- The Washington Times - Wednesday, January 8, 2003

SACRAMENTO, Calif., Jan. 8 (UPI) — Gov. Gray Davis demanded an overhaul of California's income tax Wednesday night in a State of the State speech dominated by the largest budget deficit in the nation.

The Democratic governor began his second term by focusing on the creation of jobs to invigorate the economy and address an 18-month deficit that totals a staggering $34.8 billion and is being blamed to a great extent on a tax system that is too closely tied to the performance of the stock market.

"Our budgets have become painfully dependent upon extremely volatile sources of revenue, constraining our ability to make long-term vital public investments," Davis said. "It's high time to free ourselves of this boom-bust syndrome."

Analysts say California's revenue shortfalls were to a great extent the consequence of the graduated tax system in California that places a large share of the burden on upper-income residents, most of whom have their net worth tied in to stocks and stock options.

The system worked well when the market was booming. And when Californians sold off their pricey shares and their lucrative options, they dutifully paid the required taxes. But when the market fell apart at the seams, the immediate effect on the Golden State was a drastic drop in tax revenues.

Davis opened his remarks by calling the economic straits "a challenge as great as any in our state's history."

He devoted a significant slice of his address to an outline of his plan to boost employment in California, calling jobs "the engine of our future and the cornerstone of the California dream."

Despite the tough times, Davis proposed expediting existing bond measures to finance job-creating projects such as transportation and school construction.

The plan also included reviewing small-business regulations and educational programs to train lab technicians for California's biotechnology industry.

The accomplishments of California's biotech and medical research centers were hailed in the speech as worthy of Sacramento's support for both economic and humanitarian reasons.

"The true value of this industry lies not its bottom line, but in its higher purpose," Davis said.

After introducing California's top scientists, including two Nobel Prize winners, he introduced little10-year-old Anies Garcia of Whittier who had been born with a non-functioning heart and kidneys, but was able to undergo a successful double transplant, thanks to breakthrough an anti-rejection drug developed at UCLA.

"Theirs is a story of great inspiration," Davis said of Anies and her doctor who was her escort for the evening. "It reminds us once again how Californians have always defied the odds to triumph over adversity."

The next step for Davis and the state Legislature will be less gratifying.

Sizable cuts are expected to be made in the budget this winter, a process that will only take the state so far and will no doubt stir up the ire of special interest groups ranging from road-building companies to health clinic physicians.

Another solution would be a straight tax increase, which Republicans have already come out against and the Democrats would not warmly embrace that idea, either.

The least painful — at least on paper — is changing the tax rates so that more of the burden falls on the middle class, or levying a tax on services that are not currently taxed and are a growing segment of the economy.

"There are lots of ideas out there and a lot of people have differing views," Davis aide Nancy McFadden said. "There are political pitfalls to all of them, but we need to start talking about them and it is going to be part of the budget negotiations."

In a developing sidelight, some media reports Wednesday opined that some Republican lawmakers were suspicious that Davis, who is known in many circles as a crafty and aggressive politician, had purposely overstated the extent of the budget deficit in a sleight-of-hand move to lay groundwork for potentially hefty tax increases and draconian changes in the tax system.

"Crisis is absolutely essential if you are going to get any structural (tax) reform in California, because the forces of inertia are enormous," Bruce Cain, director of the University of California Berkeley's Institute for Governmental Studies, told the Los Angeles Times. "The key to any structural change is that it has to happen in the next year and a half."


(Reported by Hil Anderson in Los Angeles)

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