Legislators See Income Tax Hike : Budget: Layoffs and a higher levy on the wealthy are increasingly likely, key state lawmakers say.

SACRAMENTO —  The $12.6-billion shortfall looming over the state budget makes it increasingly likely that Gov. Pete Wilson and the Legislature will have to raise income taxes and lay off civil service workers to balance the budget, key lawmakers said Monday.

The gap between what the state is spending and the revenues it is taking in has grown so large that it cannot be bridged with modest solutions--whatever they may be, said partisans on both sides of the aisle.

Wilson’s disclosure Friday that the projected shortfall had grown from roughly $10 billion to $12.6 billion--which would amount to about 25% of next year’s general tax revenues--prompted a flurry of closed-door meetings as lawmakers returned to the Capitol after a 10-day spring recess.

It is becoming increasingly evident that the Legislature and governor are moving toward a partisan confrontation over the budget.

Many Democrats emerged from these sessions saying it is clearer than ever that taxes need to be raised to keep the state afloat. Republicans, however, insisted that they will not agree to an income tax hike until they are satisfied that every ounce of fat has been squeezed from the state’s projected $55.7-billion spending plan.

While Wilson has not ruled out an income tax increase, a spokesman said the governor still believes an income tax hike can be avoided, despite the growing shortfall.

“We prefer to look at the program side (spending) and deal with that issue first,” said James Lee, Wilson’s deputy press secretary. “Raising the personal income tax, thereby sucking more money out of the private sector and into government coffers, is not going to address the issue.”

The Democratic leadership in the Senate and Assembly has raised the possibility of higher incomes taxes for the wealthiest taxpayers, as have the chairmen of the taxing committees in both houses.

No specific income tax measure has been introduced. But some of these Democrats support a plan to raise the top tax rate to 11% from the current 9.3% on individuals earning $100,000 or more and couples making $200,000. Such a plan could be expected to raise roughly $1.4 billion.

Democratic Assemblyman John Vasconcellos of Santa Clara, chairman of the Ways and Means Committee, said the budget cannot be balanced “equitably” without an income tax increase. But he acknowledged that an income tax hike alone would not solve the problem.

“Either you raise taxes $12 billion and some businesses would close or you cut services $12 billion and some state employees get laid off,” Vasconcellos said in an interview. “If you split the difference then you probably get some of each.”

Other Democrats blamed the shortfall on a number of changes in tax law, saying the burden should now fall on those who benefited the most. They point to Proposition 13, which slashed property taxes in 1978, and to the indexing of income tax rates, which prevented wage-earners from being bumped into a higher tax bracket every time they got a cost-of-living raise.

“My position is that the principal beneficiaries of the tax breaks of the ‘80s should be the first to pay when the bills come due in the ‘90s,” said Assemblyman Johan Klehs, a Democrat from San Leandro who chairs the Assembly Revenue and Taxation Committee. Klehs supports raising the state tax rate for top-earning tax-payers.

Republicans in the Legislature generally agreed with the governor’s opposition to higher income taxes. Some maintained a more defiant anti-tax stand than Wilson, who has proposed raising $1.7 billion from hikes in taxes ranging from as the vehicle license fee to the state levy on alcoholic beverages.

Assembly Republican Leader Ross Johnson of La Habra said it would be “very difficult” to balance the budget without laying off some state civil service employees.

“You can’t tax your way out of this problem,” Johnson said. “We have been spending as if there’s no tomorrow. State government is essentially on autopilot and it’s out of control. Before we even start talking about taxes, let’s look at what we’re doing with the taxes we’re collecting today.”

Senate Republican Leader Ken Maddy of Fresno said he believes some layoffs and tax increases will be inevitable. But he said taxes cannot be raised much more than Wilson has already suggested because “people are not happy with politicians who raise taxes. The public wants a solution, but their solution is to cut government.”

Maddy and others pointed out that simple political arithmetic probably means that any solution will be a combination of service cuts and tax increases. The extremes in either direction are too drastic for most of the mainstream legislators to stomach.

If the gap were closed entirely with taxes, it would mean an average of $400 more from each of California’s 30 million residents. If the shortfall were closed by service cuts alone, all of state government other than health, education and welfare could be shut down and still budget writers would be $1 billion short.

Wilson so far has declined to offer a plan that would close the growing budget gap. Sen. President Pro Tem David A. Roberti (D-Los Angeles) criticized the governor, saying, “It’s his job to balance the budget. His cards have to go on the table, not just ours.”

Lawmakers from both parties huddled with Finance Director Thomas W. Hayes, reportedly to discuss a major proposed restructuring of governmental responsibilities between the state and counties.

One possible outcome would be a $2.5-billion shift in health programs to the counties, along with enough new tax revenue to pay for them. Wilson has proposed a more modest transfer of health responsibilities that would be financed by higher motor vehicle fees and alcohol taxes. A legislative source said the new money for the more sweeping transfer could include a half-cent increase in the sales tax along with the proposals already made by Wilson.

Assemblyman Phillip Isenberg (D-Sacramento), who attended the meeting, declined to discuss details of the proposal. But Isenberg said some sort of major shift of programs to the local level was key to finding a solution to the broader budget problem. He called it the “first building block of any solution.”

While Isenberg and other moderates met in search of a safe middle ground, advocates of more drastic solutions were hoping that the latest jump in the size of the estimated shortfall would give them an opportunity to be heard.

Assemblyman Tom McClintock (R-Thousand Oaks) recently published a list of $14 billion in possible savings. The list includes relatively modest proposals such as eliminating the California Arts Council and ending regulation of barber shops and beauty parlors, to such radical plans as throwing out the process under which education is financed and replacing it with a $4,000 voucher for all California pupils to spend at the public or private school of their choice.

“If we can’t fundamentally reform the way we spend our tax money this year, we never will,” McClintock said.