THE fiscal plight of state governments is spurring some of the most fundamental rethinking of welfare policy since the War on Poverty a quarter century ago.From Maryland to California, lawmakers are making deep cuts in welfare benefits and, in a growing number of cases, looking at tying public assistance to changes in recipients' behavior. Proponents argue the changes will help break welfare dependency. Critics say they will worsen the plight of the poor and question the motives behind the cuts. "Public assistance is controversial," says Sheri Steisel, a welfare analyst at the National Conference of State Legislatures. "Everyone wants to help the poor - but people feel ambivalent about welfare." Perhaps the most dramatic proposal is California Gov. Pete Wilson's so-called "Taxpayers Protection Act." Unveiled last week, it would cut grants under Aid to Families with Dependent Children (AFDC) by as much as 25 percent and restructure incentives in the welfare system. It would deny extra benefits to AFDC mothers who have additional children, impose economic penalties on recipients who drop out of school or live with an able-bodied person who is not working, and freeze the benefits of newcomers to California at the level of the state they came from. Mr. Wilson, a Republican, said the proposed ballot initiative, which would include granting him broad budget-cutting authority during financial emergencies, was needed to avert a "coming fiscal train wreck" in the state. Aides say the welfare changes would save $600 million a year. The proposal is also an attempt to seize the political initiative. After enduring fights with Democrats over spending cuts and members of his own party over tax increases, analysts say the governor clearly wants to frame the agenda as the state heads into another tough fiscal cycle - and crucial election year. By seeking to put the issue on the November 1992 ballot instead of going through the Democratic-controlled Legislature, Wilson will likely tap into growing middle-class resentment over welfare spending. The state that once started a tax revolt and quickened the term-limits movement now may become a national weather vane on welfare sentiment. "The fact that California is debating this is going to give it a lot of momentum," says Isabel Sawhill, a senior fellow at the Urban Institute in Washington, D.C. "It is a proposal that fits the climate of the times," says Bruce Cain, a political scientist at the University of California at Berkeley. "But I don't think it will be easy to get passed." Most of the movement on welfare is in the form of straight cuts. Nine states this year have reduced AFDC, the basic federal-state assistance program for poor families with children, while another 31 have frozen benefits. At least six states have cut general assistance, a smaller aid program that serves adults. Among those that are looking at reforms to modify the behavior of recipients, in addition to California, are Maryland and New Jersey. In Maryland, Gov. William Donald Schaefer, a Democrat, has proposed cutting AFDC benefits by 30 percent if parents fail to pay rent, keep their children in school, or get them immunized. Democratic Assemblyman Wayne Bryant in New Jersey, like Wilson, is pushing a plan to deny extra benefits to women on welfare who have additional children. Wisconsin, which reduces grants to parents when they or their children fail to attend school, is considering a similar program. All go well beyond the idea of tying benefits to work requirements, the heart of welfare reform in the 1980s. Money is a major impetus behind the new movement. California officials say welfare benefits have been rising nearly 12 percent a year. Coming off the worst state deficit in history, California is looking at another several billion-dollar shortfall next year. Yet changes in public aid alone won't blot up the red ink: The average state spends only 3.4 percent of its budget on welfare; California spends 5 percent. Proponents of the reforms argue the poor remain poor because they lack motivation and gumption, not opportunity. Using welfare benefits as threats and rewards would convey a "moral message" and foster behavioral change. Critics argue there is no evidence that reducing government aid will push the poor to work, keep them in the classroom, or alter family planning. They call the attacks on welfare, a theme of former Ku Klux Klansman and presidential aspirant David Duke, thinly disguised racism. All these arguments are just beginning to swirl around Wilson's proposal. A recent Los Angeles Times poll showed that Californians strongly support limiting benefits to new residents, but generally oppose further cuts to the poor already here. State Democratic leaders are mulling how to counter the governor's proposal. One idea: closing tax loopholes for the rich along with reforming welfare.