By William Claiborne
Washington Post Staff Writer
Friday, May 15, 1998; Page A18

LOS ANGELES, May 14 — Gov. Pete Wilson (R) announced today that because of an "unprecedented" tax bonanza from the surging economy, California will have a budget surplus of more than $4.4 billion next year, paving the way for legislative battles over what to do with the windfall.

Legislators already have begun to stake out positions, with Democrats, in the main, wanting to use the surplus to expand school spending, finance some one-time projects and perhaps increase grants to welfare recipients. Republicans, generally, have indicated a preference for returning the windfall to taxpayers.

Although the surplus is particularly high here in the country's most populous state, the California debate is similar to those in dozens of other states finding themselves with larger-than-expected budget surpluses because of the growing economy and a more lenient federal capital gains tax law. It also is a microcosm of the debate in Washington over an anticipated federal budget surplus of $43 billion to $63 billion for the fiscal year ending Sept. 30.

Wilson released a revision of his proposed 1998-99 budget, now set at $75.8 billion. It showed that tax collections are running more than $4 billion over what budget writers predicted when the governor presented his first draft in January. "This economy is a rocket in flight, ascending at an even greater pace than we anticipated," Wilson said.

The cornerstone of Wilson's surplus plan is using a large portion of the leftover revenue to give a $3.6 billion-a-year tax cut to California car owners in the form of a 75 percent reduction in the state's value-based vehicle license fee, or "car tax" as it is better known by motorists here. Wilson's plan would reduce the vehicle tax from 2 percent of a car's depreciated value to 1 percent next year, resulting in an immediate $2 billion annual tax cut. The tax would be further reduced in the year 2002, raising the annual taxpayer savings to $3.6 billion.

The governor's revised budget also provides $500 million more to schools than called for under a funding formula required by ballot initiative, more than $300 million for environmental and flood control projects, and $100 million for the state's Infrastructure Bank, which provides credit to local governments for projects that create and retain jobs.

Wilson, who is still remembered for signing California's biggest-ever tax increase to close a massive budget deficit during the depths of the recession in 1991, characterized his car-tax proposal as the "largest tax cut in the state's history." Some of his critics suggested that he was trying to erase memories of the 1991 tax increase in preparation for another bid for the Republican presidential nomination in 2000.

The state Senate's Democratic leader, President Pro Tem John Burton, said the tax cut would make it impossible to raise California's school spending level closer to the national average – a major goal of the party this year. "We as Democrats feel that money is better spent by local governments on local issues rather than going back to Washington to the bottomless pit of federal bureaucracy," Burton said.