Schwarzenegger: $4.4B in Tax Hikes to End Deficit

California Gov. Arnold Schwarzenegger greets school children after voting at Kenter Canyon Elementary school in Los Angeles Tuesday, Nov 4, 2008. (AP Photo/Nick Ut)

SACRAMENTO, Calif. (AP) -- Gov. Arnold Schwarzenegger on Thursday proposed $4.4 billion in new taxes and a similar amount in spending cuts to deal with California's worsening fiscal crisis, saying, "We must stop the bleeding."

Much of the new revenue would come from a 1.5-percentage-point increase in the sales tax; the Republican governor described the hike as temporary but did not say how long it would last.

"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 budget shortfall.

The governor said $4.5 billion in cuts will be necessary across all state programs, including education, social services, health care and prisons.

Just six weeks ago, Schwarzenegger signed an overdue state budget that was intended to close a $15.2 billion deficit. The rapid pace of decline in the national and state economies since then has reopened an $11.2 billion gap that threatens to widen even further.

Schwarzenegger's call for tax increases puts him again at odds with legislators in his own party. Republicans, a minority in both houses but strong enough to block spending plans, were steadfastly against raising taxes in the last budget, and the state Senate's GOP caucus chairman said that won't change.

"The fact is that during this time of economic challenges is not the time to go back to California taxpayers and ask for more money from them," said Sen. George Runner, of Lancaster.

The governor often has characterized California's budget problems as being caused by runaway spending, rather than a lack of tax revenue, but he said Thursday that the severe financial crisis has flipped that.

"It is now a revenue problem rather than a spending problem," Schwarzenegger said.

The governor said the state's economic condition has deteriorated significantly since the budget was approved, with a cratering stock market and the continued decline of the housing industry.

"Many Californians have lost their homes, they've lost their jobs ... and everyone is worried about their future," Schwarzenegger said.

California's budget relies greatly on capital gains taxes, which have dropped precipitously in recent months as stock prices have plummeted. Sales and property taxes also have declined.

The worsening conditions are spreading throughout state government. California's unemployment insurance fund, which helps those tossed out of work pay their bills, is expected to be insolvent by January. That would force the state to borrow from the federal government.

Schwarzenegger's proposed $4.4 billion in tax increases includes higher sales taxes. He also alluded to bringing in more money through other "revenue generators." That might include boosting the registration fee for vehicles by $12 and taxing companies that extract oil from California, which he said would generate $528 million this year.

The governor said he would accelerate public works spending as part of an economic stimulus program: $204 million from water bonds, more than $700 million for transportation and $106 million for hospital construction.

He also proposed mortgage modifications that he said would help keep homeowners in their houses by cutting payments 25 percent to 30 percent. Schwarzenegger said state workers might be asked to take a one-day-a-month unpaid furlough and said employers and employees may have to pay more into the unemployment insurance pool to help it remain solvent.

The plan Schwarzenegger outlined on Thursday will serve as the starting point in negotiations with the Democratic and Republican leaders of the state Legislature. Some Republican votes are needed in the Senate and Assembly to reach the two-thirds majority required to pass spending plans and tax increases.

Sen. Runner said Republicans would be open to considering other ways to generate revenue for the state. That could include licensing more offshore oil drilling to collect fees and considering selling what Runner said are "billions of dollars of surplus properties."

He said Republican lawmakers oppose boosting gas taxes or the state's vehicle licensing fee, which Schwarzenegger cut shortly after taking office.

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