FLASHREPORT

When it comes to this year's California state budget, there's really only one question that matters: what's going to be the price for a tax increase?

Let's pretend that we can fast-forward past the next few weeks -- or several months -- of budget foreplay. Let's assume that the Democratic scheme to pass a tax increase by majority vote doesn't work, which means that some Republican legislative support will be necessary. Let's look into the future toward that day when the California state legislature passes a budget by a two-thirds margin for Governor Schwarzenegger to sign.

Assembly Republican Leader Mike Villines has hinted that a package of tax and regulatory incentives that could improve the state's business climate could be part of a tradeoff for some revenue increases. Because he was careful not to promise such an exchange, Villines was roasted by the state's mainstream media for intransigence. But while he was not willing to negotiate against himself by offering up absolute assurances of Republican support before any serious discussions had occurred, he was effectively sending a message to Schwarzenegger and the Democrats that he and his allies would be open to the conversation if significant job-creation measures were part of the discussion as well.

Not surprisingly, the Democratic leadership immediate rejected Villines' suggestions, displaying the same type of obstinacy for which Republicans who oppose tax increases are invariably castigated. But as the budget crisis worsens and the state's cash flow emergency looms larger, it's more than likely that at least some of Villines' suggestions could find their way into the final package.  (Here is a link to the full list of Republican legislator proposals).

The most politically difficult of the proposals will be delaying some of the deadlines for greenhouse gas reductions outlined in AB32. Schwarzenegger has staked a great deal of his own reputation on his reputation for fighting global warming, so it's difficult to see him backing down on this front. But most of the remaining items on Villines' list are supported by the governor, most notably a proposed shift in overtime work regulations from an eight-hour work day to a forty-hour week. California businesses argue that increased flexibility in scheduling work hours will lead to increased job creation and economic growth, but organized labor has been a fierce opponent of this reform for years.

Schwarzenegger has recently staked out his own ground in this discussion, insisting that the Democratic budget plan include provisions to streamline regulations to speed up infrastructure construction projects, as well as increasing opportunities for private firms to bid for state contracts. And both the governor and GOP legislative leaders have also emphasized the need for budget reform, including a spending cap and stronger restrictions for future spending growth.

The common rationale behind each of these items is simple: since tax increases would have a negative impact on California's economy, it makes sense to take steps to improve the prospects for economic growth. Short of the constitutional end run of a majority-vote budget, it's also the foreseeable way to resolve the budget stalemate. In past years, governors of both parties have peeled off the small number of Republican votes needed to achieve budget passage. But the unhappy fate suffered by most of those rogue GOP members, coupled with the smaller and more ideologically cohesive Republican caucuses, make such a strategy almost impossible.

Which means that any Republican votes are either going to have to come from the caucus leaders themselves, or at least with their tacit approval. And again, while Villines did not guarantee GOP support for tax increases in exchange for job creation and budget reforms, he has strongly implied that these are the parameters for the eventual agreement. None of these reforms will come easy for the Democrats, bringing us back to the question of what Republicans will ultimately decide is a ransom they can live with.

Last year's standoff avoided tax increases, but resulted in a largely fictional budget that was out of balance the day it was signed. This year's agreement is more likely to include a tax increase, depending on the long-term job-creation and economic growth measures that Republicans can extract in exchange for those last few votes.