State's budget hole expands to $2.6 billion

OLYMPIA — Tax increases probably can't be avoided as the state tries to patch a budget deficit that's ballooned to about $2.6 billion, top Democratic lawmakers said Thursday.

Leading options include closing tax loopholes and raising "sin" taxes, typically levied on indulgences like tobacco and alcohol. Broad-based tax hikes, such as the levies on sales and business revenue, are probably a last resort because of the fragile economic recovery, Democrats said.

Additional spending cuts also are on the table, though the Legislature already whacked billions from state programs this year to help match recession-hammered revenue collections.

"There's no way you get to $2.6 billion without looking at absolutely everything that's left," said Senate Ways and Means Committee Vice Chairman Rodney Tom, D-Medina.

Thursday's comments by majority Democrats — the clearest signal yet that tax hikes are in the future — came after the state's economic forecasters predicted further drop-offs in state tax collections.

Through mid-2011, when the current state budget expires, the treasury will collect about $760 million less than previously expected. One major factor is a lack of consumer confidence, which depresses spending in Washington's sales-driven revenue structure, chief economist Arun Raha said.

"To me, it seems like the consumer's mindset is stuck within a band of pessimism at recessionary levels," Raha said.

Consumers are likely to come off the sidelines and resume spending only when they feel more secure about the employment picture, which continues to look dark as the nation climbs back from the long recession, he said.

Hiring typically lags behind a recovery, and Washington's 9.3 percent unemployment rate in October is expected to peak at about 9.8 percent next spring.

Republican lawmakers said the fragile recovery and sour job market are precisely the reasons Democrats should avoid tax hikes when the Legislature reconvenes in January.

Instead, lawmakers should start work immediately on a package to fundamentally alter the way government services are delivered, seeking out every cent of savings before considering new revenue, said Republican Rep. Ed Orcutt, of Kalama, Cowlitz County.

"We cannot afford to raise taxes on working families or on businesses that are already struggling," Orcutt said. "We have to be careful that we don't worry so much about our budget problem that we forget about the problems of everyday people out there."

Gov. Chris Gregoire, a Democrat, will get the first crack at balancing the state's budget when she releases a supplemental spending plan next month.

By law, the governor must propose a budget that balances the books within existing revenues. But that probably won't be the last word from Gregoire, who has said repeatedly she's considering tax increases to help bridge the gap.

"I think I said last time everything was on the table. I think I just need a bigger table," said Victor Moore, Gregoire's budget director.

Raising taxes would require suspension of Initiative 960, which voters approved in 2007. That measure requires any tax increases to get either a public vote, or a nearly impossible two-thirds approval from the Legislature.

However, the Legislature may amend initiatives after two years, and Democrats have enough votes to do so.