By Denis C. Theriault

dtheriault@mercurynews.com
Posted: 02/12/2010 07:04:45 PM PST
Updated: 02/13/2010 03:14:11 AM PST

SACRAMENTO — Providing a glimmer of optimism for the state’s gloomy financial picture, California’s tax revenues soared $1.2 billion higher than expected last month, marking the third time in four months that the state’s income topped forecasts.

If that pattern holds, the state’s $19.9 billion budget gap might actually shrink this spring — which would be the first time since 2007 that the governor’s spring budget update has brought a bit of good economic news.

Although some analysts stress it’s still too early to tell, one economist estimates the deficit could shrink by $2 billion to $5 billion, buoyed by Silicon Valley’s stock market prowess. Lawmakers have floated similar numbers.

The possibility of such rosy news has quietly emboldened Democrats to put off some of Gov. Arnold Schwarzenegger’s harshest proposed cuts to education, social services and health programs.

“There is a reasonable scenario by which we can get through this budget with minimal pain,” said Senate President Pro Tem Darrell Steinberg, D-Sacramento, noting “hopeful signs” in the state’s economy after four years of multibillion-dollar deficits.

“As difficult as this budget is,” Steinberg said, “we’ve been through the worst of the worst.”

Others are less sanguine.

Although January is traditionally a bellwether month for state revenue, some analysts, economists and state officials say it’s far too soon too tell whether its outsize tax receipts will really be a harbinger of miracles to come.

Michael Cohen of the Legislative Analyst’s Office said he’d be “a little nervous about getting too enthusiastic quite yet.”

A key question is whether people were simply paying their state income taxes early in December to take advantage of a federal tax write-offs. If so, that could mean April — normally when California’s tax haul is biggest — will be leaner than usual, erasing January’s gains.

And even if Schwarzenegger’s May budget revision does contain some good news, the state still will face deep cutbacks this summer. Tax revenues would have to rise well beyond the few billion dollars some are hoping for to keep pace with current spending.

“It doesn’t lessen the urgency of taking action,” said H.D. Palmer, spokesman for the governor’s Finance Department, noting that the earlier the budget is balanced, the more savings the state can reap.

Still, the strong whiff of hope has Democrats, who control the Legislature but need a handful of Republicans to pass a budget, willing to wait for the state’s financial outlook to improve before carving up the social safety net.

The thinking is this: If there’s a good chance the state will receive extra money, then why not protect for as long as possible programs that have been slashed deeply in previous years? Just a few more months of state help, Democrats say, can make a difference for needy children who participate in the Healthy Families program or for parents counting on CalWORKs grants to keep their homes while looking for work.

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