OLYMPIA — State forecasters project a surging economy will bring in $739 million more in tax collections than expected. Although far more than lawmakers had hoped for, it's not nearly enough to erase a gaping hole in the state budget.

The updated forecast released yesterday means the gap between what the state is taking in and what lawmakers would like to spend is down to about $1.5 billion, from the $2.2 billion previously estimated.

Gov. Christine Gregoire said the news makes a bad situation a bit more bearable. "Over the last several weeks, I've been looking at draconian cuts," she said. "I'm convinced now that much of those draconian cuts will not have to be taken."

Yesterday's forecast more than erases hundreds of millions of dollars' worth of bad news for the budget in recent months, including increases in health-care caseloads and a recent state Supreme Court decision that invalidated Washington's estate tax.

Senate Minority Leader Bill Finkbeiner, R-Kirkland, said the news obliterates any argument Democrats had for tax hikes. "There's absolutely no reason to raise taxes," he said.

Key Democrats in the Senate and House said they still expect tax proposals.

"We're still not off the hook," said Sen. Margarita Prentice, D-Renton, chairwoman of the Senate Ways and Means Committee. "We're still $1.5 billion in the hole."

Rep. Jim McIntire, D-Seattle, chairman of the House Finance Committee, said that "historically, the way we've dealt with budget shortfalls like this is we've done some of both, we've raised revenue and done a lot of reductions. I think we're going to do that again."

Gregoire remains mum on whether she plans to propose taxes, as some have predicted, when she releases her budget Monday. But she also has not ruled them out.

"I'm going to take cuts. I have no choice but to take cuts. I would never envision raising $1.5 billion in revenue," she said.

Chang Mook Sohn, the state's chief economist, said Washington's economy in recent months has been growing at a faster clip than he's seen in the past four years. "Our recovery is faster than the U.S. economy," he said.

Sohn said he expects the expansion to continue through the next two years, citing a recovering aerospace industry and strength in real estate and construction.

The bottom line: The state expects to take in an additional $301 million in tax revenues during the fiscal year that ends in June and an additional $438 million in the upcoming two-year budget cycle.

Growth in sales tax accounts for the biggest part of the increase, $216 million, followed by $212 million more from the real-estate excise tax, which is benefiting from the boom in real-estate sales and prices. The business-and-occupations tax is expected to come in about $155 million ahead of the previous forecast.

Gregoire and state lawmakers are under pressure to increase spending for public schools, add capacity at state colleges and universities, make up for a loss in federal money for mental-health programs and provide pay raises to thousands of teachers and state workers.

Many people will be disappointed, she said.

"In the last month or so, some of you have seen a stream of people come through the office, individuals and organizations literally asking for billions of dollars in new programs or to keep current programs," she said. "They are worthy. But very few of them, however, are going to be funded."

Gregoire earlier this week announced a plan to eliminate the jobs of 1,000 middle managers at state agencies.

She did reaffirm commitments to provide money for pay raises and benefits to state employees and teachers, worth more than $600 millionAndrew Garber: 360-943-9882 or agarber@seattletimes.com