ARNOLD MUST RETHINK TAX HIKE, ANALYST SAYS.

Byline: David M. Drucker Sacramento Bureau

SACRAMENTO - Gov. Arnold Schwarzenegger's budget proposal, which calls for a number of one-time fiscal maneuvers and no new taxes in the fiscal year beginning July 1, won't prevent a $6 billion deficit in the following year, a top state official said Tuesday.

State Legislative Analyst Elizabeth Hill, offering her initial public comments on Schwarzenegger's 2004-05 spending plan, praised it as ``a solid starting point'' with many ``positive'' features even as she panned the absence of tax increases and reliance on various uncertainties.

``The budget presented by the governor ... poses serious questions and concerns for the Legislature,'' Hill said. ``We think revenue solutions should be considered by the Legislature, including tax increases.''

The nonpartisan official's review of Schwarzenegger's budget - which she described as a $97.2 billion budget, although the administration calls it a $99.1 billion plan - was flattering compared with her critique of the last few proposals offered by ousted Gov. Gray Davis.

She applauded the administration for accurate revenue projections, upheld its $14 billion deficit projection and complimented the new Republican governor for his willingness to cut everything, including public education.

But even if the Legislature accepted Schwarzenegger's budget as is and all of his assumptions fell into place, Hill said, California would still face a $6 billion shortfall in 2005-06 because the governor won't consider raising taxes and uses a number of one-time maneuvers similar to those for which he criticized Davis during the recall campaign.

The administration, citing a ``hostile'' business climate and double- and triple-digit workers' compensation insurance increases on businesses, said the state's economy cannot absorb a tax increase, which Schwarzenegger says would depress jobs and the tax revenues they generate.

``The fundamental problem has been, and is, the fact that California has been spending at a rate that is unsustainable,'' said H.D. Palmer, a spokesman for Schwarzenegger's Finance Department. ``We are a high-tax state.''

To bridge the predicted gap in the coming year, Schwarzenegger proposed $14.4 billion in total savings, including $9 billion in ongoing reductions and $5.3 million in one-time maneuvers.

Hill questioned the administration's forecast of $930 million in savings from selling a bond to finance payments to the state employee pension fund, and Medi-Cal cuts amounting to hundreds of millions of dollars, which could be blocked by an existing legal challenge.

She also said it's a tenuous prediction that renegotiation of Indian-gaming compacts would yield $500 million.

The administration stands by the forecast as realistic and denied that the budget used the same kind of manipulating that got Davis in trouble with voters.

Hill cautioned that the proposed cuts to health and social services could have more negative effects than raising taxes to sustain them. Echoing what she has said in previous years when the state faced a structural deficit that stretched multiple years into the future, Hill said the administration should not take any potential fix, including tax hikes, off the table.

``Liz Hill's findings tell me we need more options to solve this crisis,'' Assembly Budget Committee Chairwoman Jenny Oropeza, D-Carson, said in a statement. ``We have to do more than cut programs to the poor and make it harder for students to go to college.''

David M. Drucker, [phone]

David.Drucker(at)dailybulletin.com