A campaign spokesman for Arnold Schwarzenegger (search) said he "misspoke" Thursday in an interview with Fox News in which he said that the California gubernatorial candidate would raise taxes if the state's deficit rises or its credit rating worsens.

"Arnold Schwarzenegger has stated clearly his intention to cut taxes to make California's job climate a competitive one. Regrettably, in comments I made to Fox today, I left the impression that Arnold Schwarzenegger could consider increasing taxes based on economic conditions. I misspoke," said spokesman Sean Walsh.

"I did not articulate my own intentions and certainly not Arnold Schwarzenegger's position. The impression I left is wrong. As Arnold stated yesterday, I very much believe that Californians have been over-taxed and over-spent."

At his first press conference of the campaign on Wednesday, Schwarzenegger said only a natural disaster or terrorist strike might require tax increases. Schwarzenegger is running in the Oct. 7 recall election to replace Democratic Gov. Gray Davis (search).

But earlier in the day on Thursday, Walsh told Fox News that the state's credit rating — which is barely above junk bond status now — is more important than preserving a "no new taxes" approach to governing. Walsh emphasized the campaign is "in no way, shape or form" considering tax hikes now, but was preserving its options if the state's fiscal crisis worsens.

He said Schwarzenegger's first goal is to reduce taxes on businesses to generate job growth, but that he may raise them elsewhere to balance the budget.

"We're not going to play into any particular interest group who wants to just whipsaw us and well, it has to be automatic tax increases or it has to be a no new taxes pledge," Walsh told Fox News. "What, per se, do you do if you cut taxes in a broad array of areas and you raise taxes in one particular area so from a net perspective taxes are lower but you get attacked for raising taxes?"

Two sections of Davis' budget are facing legal challenges and could be overturned.

Court challenges to the tripling of the state car tax, which is set to raise $4 billion, and to $8 billion in borrowing may eliminate those projected funding sources from next year's budget. Even if these revenue streams survive court challenges — and that's by no means certain — the state is already projected to run a deficit of $8 billion to $10 billion.

"The truth of the matter is it could be as high as $20 billion," Walsh said. "We do not know what the totality of this fiscal situation is. For all we know, there may be zero dollars in the bank. So, you never say never because you could have a terrorist attack, you could have a natural disaster, but there could be absolutely not one nickel left in the state treasury."

Schwarzenegger has vowed to conduct an outside audit of the state's $99.1-billion budget, and has said he would appoint Hoover Institution scholar John Kogan to come up with ways to restructure the state's debt.

GOP challengers Bill Simon (search) and state Sen. Tom McClintock (search) have both taken "no new taxes" pledges and pressured Schwarzenegger to do the same. Both candidates have said Republicans should fear higher taxes if Schwarzenegger is elected. Top aides to the Schwarzenegger campaign know the tax issue is crucial to their strategy of consolidating the GOP vote.

"We need to drill down deeper in the Republican base," a top Schwarzenegger strategist said. "If we do, it will make it harder for Republican challengers to stay in the race."

One day after Schwarzenegger presented his first suggestions for overcoming the state's budget crisis, a new Public Policy Institute of California (search) poll showed that 58 percent of likely voters would recall Davis if the vote were held today. According to the poll, Schwarzenegger would get 23 percent of the vote to replace him compared to Democratic Lt. Gov. Cruz Bustamante, who garnered 18 percent. None of the other 133 candidates topped 5 percent.

Walsh also said Schwarzenegger intended to reduce regulations and lower the cost of workman's compensation and unemployment insurance. These moves could attract businesses to the state and increase revenue necessary to reduce the deficit.

Schwarzenegger pledged Wednesday to protect education from any budget cuts. Funding for kindergarten through 12th grade programs consumes 40 percent of the state budget. That spending percentage is protected by the voter-approved Proposition 98 (search).

Funding for higher education accounts for another 10 percent of the budget, health-care programs comprise 24 percent of the budget and prisons account for another 9 percent.

Even so, Walsh said Schwarzenegger would find cuts and make them stick.

"Arnold Schwarzenegger is an absolute, rock-solid fiscal conservative," Walsh said. "Our budget is $100 billion, that's bigger than the budget of most of the European community countries so we have a lot of areas that we can go and cut."