GUBERNATORIAL FACE-OFF : If Forced to Raise Taxes, This Is What I’d Do : First we must have budget reform. New taxes would be a last resort but I would back user fees similar to Prop. 111.

California’s budget process is a disaster. It ensures unfairness because it ensures that the rich get richer and the poor stay poor.

That is why my first act as governor-elect will be to start the process required to produce desperately needed budget reform.

If the process is not changed, it will guarantee continued shortchanging of mental health, public safety and other vital state activities whose shrinking share of the budget is not keeping pace with their rising costs. I want to maintain healthy spending for education--perhaps even greater than the constitutional guarantee, but within the governor’s and Legislature’s ability to set priorities for that spending.

New taxes, without budget reform, will not produce equity. I will not entertain talk of new taxes until we have first guaranteed the changes required to bring fairness to the budget and to prevent recurrence of the process that produced the present unfair mess.

Twenty years ago, there were no automatic inflation adjustments for state benefit programs. Today there are dozens of annual formula increases, totaling more than $1.6 billion annually.

Twenty years ago, nobody thought to use the ballot initiative as a tool for allocating the budget for special purposes. But in just the last two years, there have been five initiatives to spend state funds, and there are eight on the November ballot.

Twenty years ago, state and federal courts did not order hundreds of millions in spending by creating entitlements for certain benefits outside the control of the governor and Legislature.

These piecemeal court decisions, statutory entitlements and manipulations of the initiative process have earmarked tax money in one year for one special interest and in the next year for another. The result has been to create a “preferred claimant status” for some state functions while starving other critically needed services.

Is the solution to raise taxes, as the Democratic majority in the Legislature is so eager to do? Not as long as the automatic spending increases guaranteed the preferred claimants rise faster than the ability to generate tax revenues.

At worst, increasing taxes could sabotage any prospect of maintaining our recent record of unprecedented economic growth. The primary job generators of our economic engine during the past seven years have been small businesses. Increasing taxes could so threaten their small profit margin that it could be the difference between keeping their doors open or closed, between prosperity or recession.

This is particularly true for taxes on income, which is why I oppose any increases, whether by boosting rates or changing the benefits of indexing. The state Senate Office of Research just concluded that California’s income tax is the most steeply progressive in the country.

On the other hand, when some services of government directly benefit users, I would not oppose users fees that are adequate to maintain that service. For example, I supported Proposition 111 last June to ensure that gas tax revenues are adequate to maintain transportation services.

Any consideration of taxes would be my very last resort. I offer the record of no new taxes and an almost 10% cut in the per capita tax burden during my 11-year tenure as mayor of San Diego.

What are the elements of budget reform?

-- Flexibility . Elected officials must have the ability to review and change all budget allocations in light of changing economic circumstances.

Last spring I proposed a “mini-Gramm-Rudman” mechanism for the state budget to reconcile spending with available revenues and cut spending proposals that exceed revenues. I am pleased that the governor was able to win from the Legislature such a partial trigger in this year’s negotiations.

-- Equity. Billions of dollars in state funds are tied up even before a budget is proposed. No program or function should be automatically advantaged or disadvantaged when it comes to budget allocations.

-- Accountability . Priorities must be set on an annual basis by the elected representatives of the people. We are paid to make the tough decisions every year, not to let our predecessors place the budget on autopilot and increase it without regard to changing times, changing needs and changing resources.

-- Local responsibility. I will veto any unfunded legislative mandate on local governments. And I will work with city and county officials to roll back currently mandated programs to provide more discretionary revenues for local functions such as police, fire protection and sanitation.

California has a long agenda of challenges that I am eager to address. But before any meaningful progress can be made on this agenda, we must put our fiscal house in order.