Broadcast: Jan 10, 2003

While President Bush is promoting tax cuts to stimulate the economy, some state officials are considering tax hikes to fix their budget problems. California's governor, faced with a massive deficit, is searching for ways to cut expenses and boost state revenues.

Coping with a $35 billion budget deficit, Governor Gray Davis said this week that California faces hard choices. Avoiding specifics like ¹⁾tax hikes, he hinted they may be coming in the first major speech of his second term in office. Mr. Davis said he is now preparing "one of the toughest budget plans ever presented."

"It will make cuts in nearly every program, but it will restore California to sound financial footing," he said.

Since 1999, the Democratic governor has seen a budget surplus evaporate, replaced by a rising deficit. The worldwide economic downturn was part of the reason. The other part was a crisis in the state's energy business, which led to soaring power prices and left California taxpayers with a hefty bill. Mr. Davis, a popular favorite when elected four years ago, won reelection last year by a narrow five-point margin.

Remedies being discussed for the state's budget problems include a one-cent hike in the California sales tax, which now stands at just over seven percent. Economist Jack Kyser warns that a tax hike in California, or in the many other states now facing budget problems, would undercut the stimulus intended by President Bush in the recovery plan announced in Chicago Tuesday. The $670 billion plan consists mostly of tax cuts.

"President Bush, with his economic plan, wants to stimulate the economy, get the consumer out spending, with his tax cuts," he said. "And here, all the states, not just California, are probably going to be proposing tax increases. And so the federal government is stepping on the accelerator; the states are stepping on the brake."

California Republicans said they will fighting proposals for tax hikes, but say they expect them. The deadline for the new budget is June 30.

Governor Davis says he wants to promote the creation of thousands of jobs in the state by streamlining regulations for small businesses. Republicans support that, but also want the repeal of some costly protections for workers, a move they say will stimulate the state's economy.

The governor's plan for his second term in office also includes creation of a California Office of Homeland Security. Already ²⁾strapped for money, Mr. Davis is pressing President Bush to help the state pay for added security against terrorism.

Mike O'Sullivan VOA news, Los Angeles

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