Anger boiling inside Capitol

Legislative leaders say critical pieces of the state budget denounced by Gov. Arnold Schwarzenegger — and  used by him to justify an unprecedented veto — actually originated in the governor’s own Department of Finance.

Tempers flared inside the Capitol today, as sources close to all four legislative leaders – two Democrats and two Republicans – said their bosses believe the governor has been deliberately deceptive, and they are prepared to go on a joint public offensive against the governor.

Many of the so-called “revenue accelerators” — the bureaucracy’s term for speeded-up tax collections and increases in income tax withholding — came from the Department of Finance, according to documents reviewed by Capitol Weekly. The department, which writes the governor’s budgets, is among the most powerful agencies in state government.

A copy of  the governor’s “August Revision” sets out nearly $2 billion in one-time, “accelerated revenues” by changing the way personal and corporate income taxes are collected.

Schwarzenegger’s revenue acceleration proposal was part of the budget blueprint adopted by lawmakers. A similar plan to accelerate withholding collections from income tax payers has been the focal point of the governor’s derision of the budget as a “kick the can down the alley” proposal. But legislative sources say that, too, came from the governor’s office.

"The one thing that he's objecting to came from the governor's office," said Eileen Ricker, a spokeswoman for Senate Republican Leader Dave Cogdill, R-Fresno. Sources in the offices of all three other legislative leaders also say the withholding proposal originated in the governor’s office.

A Schwarzenegger spokesman said he could not confirm or deny that the withholding proposal came from the governor’s office. But he tried to distance the governor from the proposal.

“It was not in our January budget, not in our May budget, and not in our August budget,” said Schwarzenegger spokesman Aaron McLear. “This administration never included that in one of our three budget proposals.”

McLear did not dispute that the concept for increasing withholding collections may have come from the governor’s office. McLear, however,  sought to link the accelerators to the Legislature.

“They (lawmakers) are the ones who voted for this,” he said of the Legislature. “It’s their budget,” he said.

The standoff has led to an unprecedented showdown, with all four legislative leaders barely containing their outrage Thursday at the governor. A meeting of the Big 5 began late this morning, and is expected to continue into the afternoon.

Schwarzenegger, in public appearances across the state, contends that his threatened veto of the Legislature-approved state budget is justified, because the document just “kicks the can farther down the road” and does not contain an adequate cushion in future years. He suggested that the “revenue accelerators” delay meaningful action, and promised to veto the document. He says the cushion, or “rainy day fund,” is his principal reason for his veto.

But while the governor, loudly, has attacked the Legislature over these provisions, among others, he hasn’t told the public that he himself embraced a number of similar measures. He supported a two-year sales-tax increase that would have expired after he left office. In his August revision, he introduced the concept of suspending corporate Net Operating Losses for two years and accelerating the cetion of income taxes by conforming state policies to the General Accepted Accounting Principles. Those concepts were contained in the budget adopted by lawmakers earlier this week.

The dispute between the governor and the Legislature is the latest wrinkle in a bitter dispute over the 2008-09 state budget, that by law is supposed to be approved by the Legislature by June 15 and signed into law July 1, the beginning of the new fiscal year. On Thursday, California moved into its 80th day without a spending plan, a record. Also historic is Schwarzenegger’s threatened veto—a governor never before has vetoed an entire state budget.

Earlier in the week, Schwarzenegger met with legislative leaders in a last-minute attempt to avoid the governor's rejection of the spending plan. The meeting, which caught the Capitol by surprise, abruptly ended when the Republican governor went to Fresno to publicly criticize the budget.

"The goal was to try to avoid a veto," Ricker said. "The Legislature feels the state needs to move forward now. The governor's budget didn't have the votes, and this is what the compromise was."

Both the governor and his critics have mounted public relations offenses to woo the public to their sides.

The governor has accused the Legislature of approving a budget that does little to curb future spending. Lawmakers, while acknowledging that the budget has flaws, say the spending plan should be approved immediately to avoid inflicting further pain on the public.

For Republicans, there is a real incentive to avoid a veto and an override vote.

When the budget was passed, the so-called "revenue accelerators" – the speeded-up tax and withholding collections that comprise the $5 billion in new revenues that string the budget together — were approved on a majority-vote bill. In the Senate, that bill, AB 36xxx (the triple Xs officially denote the Legislature's third special session), passed without any Republican votes at all. The bill received just 21 votes in the Senate, and 43 in the Assembly.

But if the Senate is to override a veto of that measure, it would take a two-thirds vote, and that means Republicans would have to put up votes supporting what amounts to a $5 billion tax increase. That vote could prove difficult: Many Republicans earlier signed pledges that they would not approve new taxes.

But Cogdill and Villines both said they want the governor to sign the budget.

"Not getting your way is no reason to the veto the state budget," said Villines. "While not perfect, the budget compromise funds our state's priorities without raising taxes on California's hard-working families."

Cogdill went further, saying he "will vote to override the governor's veto, as should every other legislator who approved this budget."

In a Sept. 15 letter to legislative leaders, Schwarzenegger said he "would be unable to sign a budget without meaningful budget reform."  He said he would not " not sign a 'get-out-of-town budget' that punishes taxpayers, pushes the problem into the next year and includes fake budget reform," Schwarzenegger said.

By by Wednesday evening, it appeared that budget reform alone will not be enough to avoid a veto. Senate Leader Don Perata said the governor is "pretty dug in" on the idea of a veto, and budget reform alone would not be enough to avoid the governor's rejection.

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