Matthew Yi, San Francisco Chronicle Staff Writer
Thursday, September 18, 2008 4:51 PM
(09-18) 16:51 PDT SACRAMENTO -- California's longest-ever budget standoff ended this afternoon when Gov. Arnold Schwarzenegger and legislative leaders struck a deal, avoiding the governor's promised veto of a budget the Legislature approved earlier this week.
The compromise, expected to be approved Friday, eliminates extra withholdings from workers' paychecks and revenue from a tax amnesty program. It bridges the $17 billion budget gap by adding penalties on corporations that underpay quarterly income taxes and reduces reserve funds, according to lawmakers and legislative sources.
Lawmakers also agreed to Schwarzenegger's demand to make it more difficult for the state to dip into a rainy-day fund to be created as part of budget reforms to avoid future fiscal crises like the one this year, when a slowing economy resulted in a huge budget deficit.
The governor met for more than an hour this afternoon with legislative leaders to finish the deal, after he told them at a meeting this morning to strengthen fiscal reforms and eliminate accounting maneuvers in the budget - or send it to him for a veto.
Legislators had faced a quandary, legislative sources said: The budget approved early Tuesday had the support of more than two-thirds of the Legislature, but the provision to raise billions of dollars in early collection of some taxes needed only a simple majority to pass.
No Republicans voted for that portion of the budget, saying it was the equivalent of raising taxes, and without support from GOP lawmakers, Democrats would not have been able to muster a two-thirds vote to override a veto by the governor.
The budget-related legislation had been criticized by several politicians because it called for the state to collect more taxes earlier to pump revenue into the state budget. The money would be refunded to taxpayers later if they had overpaid taxes.
Facing billions of dollars in deficit, the governor last month proposed a temporary increase of 1 cent in the state sales tax, which would be followed by a 1 1/4-cent cut after three years. Schwarzenegger pitched the idea as a long-term tax cut, although the proposal got little support from his Republican colleagues in the Legislature.
The governor said this week that he also has problems with state lawmakers' fiscal reform proposals in their approved budget.
On Monday, as lawmakers prepared to vote on a package of budget bills, Schwarzenegger sent a letter to legislative leaders threatening to veto the budget unless three changes were made to strengthen fiscal reforms.
Lawmakers adopted two of the suggestions: increasing the amount of the rainy-day fund and creating more-stringent rules to force the state to continue depositing money into that fund. But lawmakers rejected Schwarzenegger's third proposal, which would allow the state to dip into that fund only when the state's revenues fall below the estimates in the enacted budget.