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Schwarzenegger proposes tax hikes

The nation's economic meltdown is taking state budgets down with it — especially in California, where Gov. Arnold Schwarzenegger said Thursday he wants to close a $11.2 billion gap by raising taxes.
/ Source: The Associated Press

The nation's economic meltdown is taking state budgets down with it — especially in California, where Gov. Arnold Schwarzenegger said Thursday he wants to close a $11.2 billion gap in part by raising sales taxes on everything from cars to Disneyland tickets.

Several other states are confronting billion-dollar deficits. Some, including Massachusetts, North Carolina and Wisconsin, have ordered broad and deep cuts in spending, while others have only begun to consider how to compensate for their revenue wells drying up.

Schwarzenegger wants $4.5 billion in cuts; one of his proposals would force state employees to take a day off each month without pay and give up two holidays. But he says cuts alone aren't enough to deal with a steep drop in revenue, and he proposes $4.7 billion in tax hikes, including a three-year, 1.5-percentage-point increase in the sales tax.

"We have a dramatic situation here and it takes dramatic solutions ... and immediate action," Schwarzenegger said as he called the Legislature back into session to deal with the shortfall. "We must stop the bleeding."

California's bleak new projections come just six weeks after Schwarzenegger signed this year's budget, which made $7.1 billion in cuts to services to help close a $15.2 billion deficit.

"I'm not a believer in taxes, I'm not a believer of increasing fees. It's just under these circumstances it's necessary to do," Schwarzenegger said.

California relies heavily on capital gains taxes, which have plunged along with the stock market. Sales taxes also have plummeted as consumers have cut off nonessential spending. And California is among the states hardest hit by falling housing prices.

The state controller issued a statement saying California runs "the very real risk" of a severe cash shortage by the end of the year and may have to resort to borrowing so it can balance its books. Its deficit is now 11 percent of general fund spending and could double by next fiscal year if not addressed immediately, the controller said.

States feel the pinch
The shortfall in Arizona is even worse, on a percentage basis, than California's. Gov. Janet Napolitano on Thursday said the state's deficit had grown to an estimated $1.2 billion, or 12 percent of general fund spending, forcing lawmakers into a likely special session by the end of the year.

The deficit in Washington state is projected at $3.2 billion, but could grow by the time officials get an update later this month.

Nevada Gov. Jim Gibbons and the Legislature have cut spending by $1.2 billion because of declining tax revenue, but Gibbons warned lawmakers they might have to cut another 14 percent when they go into session in February.

Wisconsin's governor has ordered state agencies to trim 10 percent to cover a $3 billion hole over two years, while North Carolina's governor has ordered several departments to make do with 5 percent less. Massachusetts Gov. Deval Patrick announced last month that the state would eliminate up to 1,000 jobs and make more than $1 billion in cuts and spending controls to bridge a growing budget gap.

New York Gov. David Paterson last week asked Congress for as much as $8.6 billion from an economic stimulus measure Democrats are considering. He already has called a special session for later this month to tackle a $1.5 billion deficit for the fiscal year that ends in April and warned that New York's deficit could hit $47 billion by 2012.

Change in rhetoric
California's crisis has brought a change in rhetoric from Schwarzenegger. Since taking office in 2003, he has blamed "autopilot spending" by the Legislature whenever California has confronted fiscal woes, but on Thursday he said, "It is now a revenue problem rather than a spending problem."

His proposed sales-tax increase would apply to items as varied as cars, amusement park and sporting game tickets and appliance and vehicle repairs. Taxes on alcohol also would increase.

The sales tax plan met immediate opposition from some in the business community. Peter Welch, president of the California New Car Dealers Association, said raising vehicle prices by hundreds of dollars is the last thing his faltering industry needs.

"The fact of the matter is we are in an historic car recession (that's) bordering on a depression," he said. "We actually think we need an economic stimulus package to get people to come in and buy cars. This is just the opposite."

Other revenue could come from raising the registration fee for vehicles by $12 and taxing companies that extract oil from California, which Schwarzenegger said would generate $528 million this year.

The governor also wants to accelerate hundreds of millions of dollars in public works spending to spark job creation. At the same, the newly unemployed would struggle more under his plan. He wants to tighten eligibility for unemployment benefits because the state's unemployment insurance fund is on the brink of insolvency.