Tax boost predicted in face of California's largest deficit since '91

California's looming budget deficit has ballooned to an estimated $14 billion, creating a crisis that fiscal experts say is likely to require higher taxes in addition to across-the-board cuts in education and other services.The last time the state faced a major tax increase was more than 15 years ago. In 1991, Gov. Pete Wilson faced a $14.3 billion budget shortfall, and state officials responded by increasing the sales taxes and imposing an income tax on the wealthiest Californians for five years.Finding addition revenue will be critical for the state's next fiscal year, which begins July 1, said Steve Levy, director and senior economist at Palo Alto's Center for Continuing Study of the California Economy."I'm sure people can tighten their belt a little bit, but not at $14 billion," he said.Members of Gov. Arnold Schwarzenegger's staff cited that estimate of the deficit in a meeting this week with representatives of social-services groups, said Angela Gilliard, a lobbyist for the Western Center on Law and Poverty, an advocacy group for the poor.The shortfall would be about 10 percent of a total spending plan that probably will be close to $150 billion.H.D. Palmer, a spokesman for the state Department of Finance, acknowledged that the projected shortfall is significantly higher than the forecast by the nonpartisan legislative analyst last month.On Nov. 14, the analyst reported that the slumping housing market and the state's slowing overall economy would result in a nearly $10 billion budget deficit in the next fiscal year.Palmer said his office's forecast is based on additional information gathered since the legislative analyst's report, including actual sales tax receipts for the quarter that ended on Sept. 30.The slumping housing market, fueled by the subprime mortgage meltdown, remains the main cause of the state's deepening fiscal woes, having an impact on a wide range of revenue including that from property and sales taxes.With such a gloomy fiscal outlook, the budget battle between the Republican Schwarzenegger and Democratic-controlled Legislature is likely to be a tough fight throughout all of next year.Budget negotiations will be more challenging in that the governor and the Legislature also are trying to work out a deal on health-care reform, revamp the state's infrastructure for water supply and make improvements to public education during 2008."All three of those issues show that there is a significant need in California for more public investment, not less," said Jean Ross, executive director of the California Budget Project, an advocacy group for low- and middle-income Californians.Ross said California is long overdue for a tax increase."One of the reasons why California has persistent budget problems is the fact that unlike many other states, we haven't looked at revenue increases," she said. "If everything is going to be on the table (in budget negotiations), indeed everything should be on the table, including tax increases."Levy, of the Center for Continuing Study of the California Economy, agreed that just slashing spending may end up hurting the state's overall economy."I don't see where this state is well-served by making a $14 billion cut or even a $7 billion cut," he said.One way to raise revenue would be to apply sales tax to services, such as those provided by attorneys, accountants, consultants, architects and auto-repair shops, Levy said."This has been widely discussed around the country for 10 to 20 years. We are a service economy, and we have this sales tax (on goods) that's doomed to grow slower than the economy," he said.According to his research, California's services industry is worth about $700 billion a year, the biggest chunk representing health care.That alone could raise about $10 billion in additional revenue to the state and local governments, Levy said.Also, a temporary increase in income tax for the rich, such as the one imposed by Wilson in 1991, also would be helpful -- especially since a large chunk of the looming budget deficit comes from California's repayment of bond debts, which is expected to dramatically decrease in a couple of years.Palmer said his agency is putting together options for Schwarzenegger to consider as he prepares to unveil a balanced budget in January. One thing that won't be on the menu will be new or increased taxes, Palmer said.(E-mail Matthew Yi at myi(at)sfchronicle.com.)(Distributed by Scripps Howard News Service, www.scrippsnews.com.)