State's budget gap expected to grow to $2.8 billion

OLYMPIA — It's time for decisions.

The state revenue forecast released Friday projects an additional $118 million drop in tax collections, bringing the state budget shortfall to about $2.8 billion.

Democratic budget writers said the new forecast doesn't change much in terms of how they'll go about balancing the budget.

"This is sort of what we expected," said state Rep. Ross Hunter, D-Medina, chairman of the House Finance Committee.

But the forecast does represent the last piece of information that budget writers had been waiting on before deciding on tax increases.

Senate Democrats tentatively plan to release a proposal next week to balance the budget through tax increases, spending cuts and other measures. Gov. Chris Gregoire may come out with her own tax package next week as well.

House Democrats will follow, and then all sides will try to hash out a compromise. No details are available yet on what kind of taxes will be proposed.

Sen. Ed Murray, D-Seattle, chairman of the Senate Democratic caucus, said no decision has been made, but his caucus is looking at raising between $780 million to $1 billion primarily by increasing taxes and closing tax exemptions.

"There are several scenarios that members are still looking at. One is to look at individual taxes (such as a tax on bottled water). The other is to look at some type of temporary general sales-tax increase," he said.

Compared with past forecasts, the revenue drop projected Friday was relatively minor. State officials say the forecast actually would have shown a small increase in collections for the first time in more than two years, except for a recent court decision.

The court ruling broadened an existing tax exemption to include out-of-state direct sellers, such as door-to-door sales. The court decision reduces tax collections.

The Legislature is considering bills that would re-establish the tax on out-of-state companies.

The revenue forecast indicates the state's economy is recovering, but certain areas are performing better than others.

Arun Raha, the state's forecaster, said for example that there have been significant increases in exports and business purchases of equipment and software, however, "the commercial real-estate sector is still in decline with no bottom in sight."

"The Great Recession may be over, but it has wrought havoc on the economy, which will take time to heal," he said.

Republicans said the best way to help the economy recover is to not increase taxes.

"The first thing is, do no harm," said Rep. Ed Orcutt, R-Kalama. "Consumer spending is low. One of the (Democrat's) proposals ... is to increase the sales tax by 1 percent. That will not increase consumer spending. It will slow it."

Democrats in the House have introduced House Bill 3183, which would increase the sales tax by a penny but phase it out as the unemployment rate drops. It's not clear if the bill will go anywhere.

Andrew Garber: 360-236-8268 or agarber@seattletimes.com