OLYMPIA — Just three months after Gov. Chris Gregoire signed a two-year, $32 billion spending plan with seemingly healthy reserves, the state budget is once again deep in the red.

The sputtering economy is projected to leave the state with $1.4 billion less in tax revenue than expected between now and the end of June 2013, according to a forecast released Thursday.

The new projection, combined with a down forecast in June, wipes out the state's reserves and leaves a big hole in the budget. Gregoire said she views it as close to a $2 billion gap, given the need to leave money in reserve.

A special session of the Legislature toward year's end to fix the budget appears unavoidable, the governor said.

Gregoire said in an interview she will not make across-the-board budget cuts. "That is a meat-ax approach and will not work now," she said. "They (lawmakers) are going to have to step up, work again together like they did last session, and we're going to have to take some action."

There is growing talk among Democrats about putting a tax package before voters next year to bring in more revenue, a move Republicans oppose.

The governor said she'd want to wait to hold a special session until after the next revenue forecast in November, should the numbers get worse.

One thing she's worried about is the gridlock in Congress and the automatic across-the-board cuts to defense and other programs that will kick in if no deficit-reduction plan is approved.

"We are a highly defense-dependent state. The impact would be greater to us than many other states," Gregoire said.

Legislators say there are no easy places to look for money, after they earlier this year cut projected spending by more than $4 billion, including deep cuts to higher education that were partially offset by allowing double-digit tuition increases. K-12 education and health-care programs were also hit hard.

Most of the budget is difficult to cut because of federal strings attached to programs, and state constitutional protection for the bulk of K-12 spending.

Higher education is one of the more vulnerable, unprotected areas of the budget. But there's resistance to make deeper cuts there.

With a $2 billion shortfall, "if you were to do across-the-board cuts, you'd wind up taking about 30 percent of our higher-ed investment," said House Ways and Means Chairman Ross Hunter, D-Medina. "I just don't think we're going to do that."

Responding to Gregoire's earlier call to plan for budget cuts, the state Board of Community and Technical Colleges on Wednesday voted to declare a financial emergency for the two-year college system, which gives the colleges the authority to expedite layoffs for tenured and tenure-track faculty.

Randy Hodgins, vice president of external affairs for the University of Washington, said the school is working up a plan for trims that it will release next week, but it is short on specifics, because there are so few programs left to cut.

The UW may need to trim $20 million to $40 million over the next two years — that's about 5 to 10 percent of the budget — "but even that may not be enough" if state revenue keeps dropping, he said.

Senate Ways and Means Chairman Ed Murray, D-Seattle, said, "Given what the cuts will look like ... we... should give voters an option about whether they want to look at funding some of the things that we would have to eliminate or significantly reduce."

Republican leaders on Thursday weren't budging.

"How do you get more revenue out of people who still aren't back to work?" said Rep. Ed Orcutt, R-Kalama, chairman of the Economic and Revenue Forecast Council. "How do you get revenue out of employers who are struggling to put people back to work?"

Tax collections are not increasing as fast as projected because the economy can't seem to get in second gear.

"We are in the fragile aftermath of the Great Recession, where a return to normalcy seems like a mirage in the desert — the closer we get to it, the further it moves away," the state's chief economist Arun Raha said at a presentation Thursday.

"Fear and uncertainty have overwhelmed consumer and business behavior. Political gridlock in the nation's capital gives little hope that the full tool kit of policy options will be acted on. In an increasingly interconnected world, we are not immune to Europe's problems either, as they struggle with fiscally imprudent states on the periphery, trapped in a structurally dysfunctional union. Every time our state has looked like it would break out of the malaise, it has been sucked right back in."

Raha sees no indication things will turn around soon. "The Great Recession is turning out to be a never-ending nightmare," he said. "I truly wish I could assure you this nightmare is about to end, but I see no end in sight."

Every revenue forecast for the past three years — except one — has been down, often by several hundred million dollars.

Gregoire defended Raha's forecasts, saying Washington is not alone. "We're by no means unusual. It's happening everywhere around the country," she said.

Staff reporter Katherine Long contributed to this report.

Andrew Garber: 360-236-8266 or agarber@seattletimes.com.