Gov. Gray Davis paints a dire picture of what will happen if the Legislature fails to approve his budget plan quickly, including his proposal for a temporary half-percentage point increase in the state sales tax.

Failure to boost the tax would jeopardize the state's ability to sell $10.7 billion in deficit financing bonds at a reasonable price, saddling California with higher interest rates, the governor warns.

The deficit bonds are a key part of the governor's strategy for closing the $38.2 billion budget deficit. As specified Wednesday in Davis' revision to his 2003-2004 budget plan, revenue from the sales tax would be earmarked for repaying the bonds. When asked if the plan to borrow money works without raising taxes, Davis' answer was a blunt "No."

Bond market experts say the governor is partly right. Without the tax increase, it would be harder to sell the bonds.

But, they add, a bond sale could still go through without the tax increase, as Republican lawmakers are demanding. And, in the scheme of things, the extra interest costs wouldn't amount to much -- $40 million or $50 million a year, and possibly less -- relatively small change in a $96 billion budget.

Assemblyman John Campbell, the Republicans' point person on the budget in the lower house, said an additional $50 million in interest each year isn't much compared to the damage he claimed Davis' tax proposals would do to the state treasury. "The $50 million is acceptable," Campbell said.

Investors say they want more details about the securities. At this point, the Davis administration says the bonds would be outstanding for about five years and would be retired using the sales-tax revenue. But, even with scant information, many investors say they will take a close look.

Mike Niedermeyer, head of institutional investment for Wells Fargo, agrees that new tax revenue set aside to pay bondholders would allow the securities to carry a higher credit rating, making them more attractive. A higher rating might mean the bonds could be sold at an interest rate four-tenths of a percentage point lower than state bonds supported by general revenue, he estimates. A rough back-of-the-envelope calculation suggests that would save $40 million or more in annual interest costs.

"As part of an overall (deficit reduction) package, it would make it more credible to municipal-bond buyers," Niedermeyer said.

Still, the bonds could be sold even without special tax revenue to back them up.

"If there were a dedicated revenue source, I may pay more for a bond," said Robert Miller, who manages a $700 million portfolio of tax-free California state and municipal securities for the mutual fund group American Century Investments. But even without the special tax, "at the appropriate (interest rate), I'd be a buyer. It gives a higher yield to my shareholders."

Analysts stress that the most important issue affecting California's ability to borrow isn't how the deficit bonds are supported. Rather it's whether state officials are seen as dealing with the budget deficit in an effective way, meaning that they are making permanent moves to bring spending and revenues into line.

"They need to make strides in dealing with the structural deficit," said David Moore, American Century's director of municipal research.

California's image with investors will affect far more than Davis's proposed deficit bond issue.

The state has about $27 billion in debt that has been approved by voters or the legislature but hasn't been brought to market yet, calculates David Hitchcock, an analyst with the rating service Standard & Poor's. "The state has a ton of authorized but unissued debt," Hitchcock said.

In addition, California has to sell more short-term debt to pay its bills while it waits for a budget to be approved when existing short-term securities come due.

California is already Standard & Poor's lowest-rated state, Hitchcock noted.

Failure to come to grips with the budget would make investors even more skeptical and drive up interest costs for a wide range of state debt.

The failure so far of Democrats and Republicans in Sacramento to cooperate on a budget plan hurts California's standing with investors. "With the ongoing political wrangling, the market is going to be a bit uneasy," said Robin Rappaport, an analyst with the Los Angeles investment advisory firm Payden & Rygel.

One thing investors will be watching closely is whether the state can approve a budget close to the end-of-June deadline. "If this thing turns into a stalemate and nothing is getting done, it will hurt," Moore said.

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TAX INCREASES THAT GOV. DAVIS HAS PROPOSED
On Wednesday, Gov. Gray Davis announced a revised May revision that includes a series of tax increases. Here is a more detailed look at his proposals:

SALES TAX Beginning Oct. 1, 2003, the state would impose a temporary one- half cent sales tax increase. Total sales tax paid varies between different cities and counties, depending on local taxes. The state will use the money to pay off bonds financing the debt. It is anticipated that the tax would be in place for five years.

CIGARETTE TAX Davis proposed a 23-cent-per-pack increase beginning July 1, and another 40-cent-per-pack increase starting July 1, 2004.

PERSONAL INCOME TAX A new 10.3 percent upper-income tax bracket will be added. It will apply to single filers earning more than $150,000 and joint filers earning more than $300,000. Californians will have to pay the new tax when they file their 2003 taxes.

VEHICLE LICENSE FEE
Davis said he expects the vehicle license fee to be raised sometime before July 1. It is done as an administrative action, with the Department of Finance sending a letter to the Department of Motor Vehicles, telling it to raise the tax because of a shortage of state funds. State law requires the Department of Motor Vehicles to give car owners 60 days' notice before registration fees are due, and it will take about 30 days to reset state computers that send out the notices. Since 1998, license fees have been reduced by 67.5 percent. The average license fee is $73 but would increase by more than $150 if the fees go up.

How much you would pay
To figure out how much you will pay if the vehicle license fee goes up,
take 2 percent of the price paid for a new or used vehicle, then calculate
depreciation using this table. Year of
ownership Multiply by this number
First No depreciation
2nd .90
3rd .80
4th .70
5th .60
6th .50
7th .40
8th .30
9th .25
10th .20(x)
(x) Use 15 percent for 11 or more years of ownership.
Examples
Here are some examples of how fees would go up on some cars:
-- For a 2003 Ford Explorer XLS sold for $28,050, the vehicle license fee
would go from $182 to $561.
-- For a 1999 Toyota RAV4 purchased in the model year and owned by the same
person, the fee would go from $99 to $304.
-- For a 1999 Honda Civic EX purchased used this year for $7,950, the fee
would go from $52 to $159.
Sources: California Department of Motor Vehicles, Chronicle research
Chronicle Graphic