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Schwarzenegger Preps ‘Terrible Cuts’ to Close Deficit

May 11 (Bloomberg) -- California Governor Arnold Schwarzenegger will seek “terrible cuts” to eliminate an $18.6 billion budget deficit facing the most-populous U.S. state through June 2011, his spokesman said.

Schwarzenegger, 62, who will introduce his revised budget plans on May 14, has said he won’t seek tax increases to bolster California’s finances. The Republican’s forecast for the budget gap may rise after revenue fell short of his targets last month.

“We can’t get through this deficit without very terrible cuts,” Schwarzenegger spokesman Aaron McLear told reporters in Sacramento. “We don’t believe that raising taxes right now is the right thing to do.”

California’s revenue in April, when income-tax payments are due, trailed the governor’s estimates by $3.6 billion, or 26 percent. The gap wiped out gains from the previous four months, leaving collections $1.3 billion behind projections for the budget year that ends in June.

Schwarzenegger’s newest plan will revise the proposals introduced in January to account for the tax-collection shortages. In January, the governor said California may have to eliminate entire welfare programs, including the main one that provides cash and job assistance to families below the poverty line, without an influx of cash from the federal government.

Since then, the Democrat-controlled Legislature has made few strides toward closing the budget hole. Legislation adopted during the emergency session ordered by Schwarzenegger knocked about $1.4 billion from the deficit.

Tax Measures

Democrats this week introduced a package of bills that would raise as much as $2.9 billion annually by imposing a 10 percent severance tax on oil production in the state, repealing corporate-tax breaks approved last year to spur job growth and assessing commercial property taxes differently.

Schwarzenegger is girding for his final fight over California’s budget before leaving office in January. Over the last two years, he and lawmakers have had difficulty redrawing the budget fast enough to make up for revenue lost amid rising unemployment.

By the beginning of 2010, Schwarzenegger and the lawmakers had closed a $60 billion deficit partly by slashing spending on schools, temporarily raising taxes and borrowing from local governments.

The fiscal strains have left California with the lowest credit rating among U.S. states. A taxable California bond maturing in 2039 traded for a yield of 7.08 percent today, up from an average of 6.87 percent on May 6, according to Municipal Security Rulemaking Board data.

To contact the reporter on this story: William Selway in San Francisco at wselway@bloomberg.net; Michael Marois in Sacramento at mmarois@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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