California's budget deficit could reach nearly $28 billion over the next two years unless drastic steps - including raising new taxes - are taken to stem the fiscal bleeding, the nonpartisan legislative analyst's office said Tuesday.

Calling it a "monumental problem," Legislative Analyst Mac Taylor said the state faces several challenges coming off a difficult budget year, with revenue continuing to falter this year and an economic recovery unlikely in the near future.

Without bold fixes, the state will have budget gaps of about $22 billion a year through 2014, the analyst said: The budget deficit is so deep that simply cutting spending won't work without devastating funding to key programs such as education and health care.

"It is true, this is the last moment to raise taxes (when the economy is struggling), but you really don't have a choice," Taylor said.

The legislative analyst didn't offer a complete tax package but suggested that lawmakers consider raising the state income tax by 5 percent and increasing the vehicle license fee from 0.65 percent to 1 percent of the vehicle's value.

Democratic lawmakers have been arguing for new taxes and GOP Gov. Arnold Schwarzenegger this summer reversed his own stance, saying taxes must be part of the budget solution. But Republican lawmakers remained adamant Tuesday about their no-taxes position.

"We have an economic problem that has severely compromised our tax revenue," said Assemblyman Roger Niello, R-Fair Oaks (Sacramento County), vice chairman of the Assembly Budget Committee. "To immediately talk about increasing tax rates and pile additional burden on an economy that's struggling to be productive is unproductive."

The $27.8 billion budget deficit projected by the legislative analyst's office is larger than the estimated $24 billion revenue shortfall that Schwarzenegger announced last week in calling a special legislative session. The governor's estimate did not include potential increases in expenses.

Additional expenses include increasing numbers of people enrolled in health and social services, which is typical in tough economic times, to additional firefighting costs, according to a 28-page report Taylor released Tuesday.

The state will also likely have to pony up an additional $1.5 billion for local governments, which are expected to see sharp reductions in property tax receipts as a result of the rapid decline in the state's housing market, the report said.

Assembly Speaker Karen Bass, D-Baldwin Vista (Los Angeles County), called the state's looming deficit "shocking," adding that the federal government should help bail out states like California that face dire fiscal straits.

"We can't let one of the world's largest economies go over the cliff," she said.

Aaron McLear, a spokesman for Schwarzenegger, said the legislative analyst's office's report underscores the seriousness of the governor's assessment of the state's financial woes.

"We have a serious problem that needs to be addressed immediately, and the right approach is a balanced approach of both cuts and taxes," McLear said.

With the economy in a tailspin, Schwarzenegger last week warned that the state's revenue could shrink by $11 billion in the current fiscal year, which ends June 30, followed by $13 billion more the following year.

He issued an executive order calling for a special legislative session and proposed a combination of taxes, including a temporary 1 1/2-cent increase in the sales tax and a severance tax on oil production. The governor also proposed billions of dollars in cuts to education, health care and funds for the poor.

The Legislature has until the end of the month to negotiate a compromise package before newly elected lawmakers begin their terms on Dec. 1. Bass said the state Assembly plans to hold a committee hearing Friday on Schwarzenegger's package of proposals to fix the budget as well as the legislative analyst's own assessments and suggestions.

Matthew Yi, Chronicle Sacramento Bureau

http://www.lao.ca.gov/2008/bud/nov_revise/nov_revise_overview_111108.pdf
http://www.lao.ca.gov/2008/Webcasts/nov_revise_08/nov_revise_08.aspx