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Originally published January 10, 2010 at 10:02 PM | Page modified January 10, 2010 at 10:57 PM

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$2.6 billion gap in state budget prompts Dems to look at taxes

As the Legislature starts work to close a $2.6 billion budget gap, key lawmakers say tax increases may be inevitable. Top Democrats have indicated they'll suspend or modify Initiative 960, which requires a two-thirds legislative majority or voter approval for tax increases.

Seattle Times staff reporter

OLYMPIA — As the Legislature starts work today to close a $2.6 billion budget gap, key lawmakers say tax increases may be inevitable.

To clear the way, top Democrats have indicated they'll suspend or modify Initiative 960, which requires a two-thirds legislative majority or voter approval for tax increases.

But which taxes would be raised and who would pay them is far from clear.

Instead of a general tax increase — such as boosting the state sales tax — some top lawmakers are talking about more targeted approaches, such as extending the sales tax to candy, muffins and bottled water and increasing tobacco taxes.

During the 60-day session, they also would like to close tax loopholes and exemptions that allow companies to avoid sales or business taxes.

Gov. Chris Gregoire and Democratic leaders who control the Legislature haven't laid out many specifics on how to deal with the continuing drop-off in revenues.

Instead, they have been talking up the ugly consequences of deep budget cuts that will be needed if the state doesn't somehow raise more money.

"It's not the desire to raise revenues. It's what we believe is the moral necessity," said Senate Majority Leader Lisa Brown, D-Spokane.

An all-cuts budget proposed by Gregoire last month would gut services to the poor and suspend programs such as all-day kindergarten. Subsidized health insurance for thousands of low-income families and aid to people unable to work because of disabilities also would be eliminated.

Even as she released that proposal, Gregoire made it clear she did not support it. By law, the governor was required to submit an initial balanced budget with no new revenues.

Gregoire's office is drafting a second budget plan that would "buy back" at least $700 million of those cuts. As of late last week, her office was not talking in any detail about where she'd find the money to do that. Gregoire is expected to present some of her choices before a legislative panel this week.

Lawmakers are waiting for two pieces of news before they make any final choices on taxes. A February revenue forecast could ease or worsen the budget shortfall. And the federal government may come to the state's rescue — as it did last year.

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In an interview, Gregoire said Washington might be able to get by with little or no tax increase if enough federal money comes through to plug this year's budget hole.

"That's still an open question to me." Gregoire said.

Lawmakers expect to receive $500 million to $1 billion from the federal government, much of it in the form of higher Medicaid reimbursements. State leaders have complained for years that the federal government reimburses Washington for Medicaid at a lower rate than states such as Florida and New York.

Congress last year approved similar help that allowed the Legislature to plug an estimated two-year, $9 billion budget gap largely without tax increases.

"I would put that in the category of manna from heaven," said Rep. Ross Hunter, D-Medina, who chairs the House Finance Committee. "If you have got a billion dollars from the feds, I think you are in a different problem space."

Of course, any one-time federal money would leave the state facing the same long-term budget problem after the cash runs out.

Backlash fears

A coalition of union, education, environmental and other groups is urging the Legislature to consider tax increases to avoid deep cuts to services that they say would be destructive in the long run.

David Rolf, president of Service Employees International Union Healthcare 775NW, which represents health-care workers, said Democrats should wield their majority and raise increase taxes. He said he worries lawmakers will be too timid out of fear of a voter backlash.

"They need to go see the Wizard of Oz and go get a brain and some heart and some courage," Rolf said.

To start with, Rolf said lawmakers should look at all tax exemptions carefully. For example, professional services such as law and accounting firms don't charge sales taxes.

"I don't understand why I pay taxes when I go to Jiffy Lube, and when Microsoft hires Perkins Coie [law firm], they don't," Rolf said.

But conservatives and business groups say tax increases would only slow the economic recovery.

Don Brunell, president of the Association of Washington Business, said "any tax is going to burn someone" and noted that businesses already are struggling to pay higher unemployment-insurance rates.

"We're already starting really with a little heavier burden than we did last year," he said.

Given that this is an election year, Brunell said he expects legislators to be "spending quite a bit of time looking at what taxes don't put them in peril with the public."

Republicans, vastly outnumbered in both the state House and Senate, say that, instead of tax increases, the state should think about reforms such as contracting out government services to the private sector.

To make it easier to increase taxes, top Democrats have said they'll suspend or modify Initiative 960. The initiative, approved by 51 percent of voters in 2007, requires a two-thirds majority of the Legislature — or voter approval — for tax increases.

Under state law, lawmakers — with a simple-majority vote — can modify voter-approved initiatives two years after they've passed.

Brown said I-960 had "some really ludicrous consequences," such as making it difficult for lawmakers to close tax loopholes.

I-960 promoter Tim Eyman blasted the lawmakers' plans as "despicable" in an e-mail to supporters last week. He vowed to launch another initiative this year to reinstate the two-thirds tax-vote requirement if lawmakers suspend it.

State sales tax

The simplest way for the Legislature to raise money would be to increase the state sales tax. Top lawmakers already have ruled out property taxes, and perennial talk of an income tax is likely to go nowhere this session.

A halfpenny increase in the sales tax would raise more than $518 million a year.

The state's sales-tax rate, 6.5 percent, has not increased since 1983. But local governments, sometimes with voter approval, have added to that to pay for expenses such as transit, criminal justice and stadiums. In Seattle, people who eat at restaurants now pay a total sales tax of 10 percent.

Legislative leaders say a general sales-tax increase is not their first choice.

As one of eight states with no income tax, Washington's reliance on the sales tax already disproportionately burdens lower-income families.

The Institute on Taxation and Economic Policy ranked the state's tax code as the most regressive in the nation last year.

House Majority Leader Lynn Kessler, D-Hoquiam, said she hopes a sales-tax increase is "off the table."

Brown, the Senate majority leader, said she doesn't want a sales-tax increase unless it is paired with a tax rebate for lower-income families.

At a session preview last week in Seattle, House Speaker Frank Chopp, D-Seattle, predicted lawmakers would not go for a general sales-tax increase.

Chopp hinted at a more selective approach, linking specific taxes to specific services.

For example, he said money raised by extending the sales tax to candy and gum should be dedicated to paying for children's dental care.

As a political strategy, linking tax increases to popular services has worked for Democrats in the past.

A few years ago, the Legislature imposed a tax on the estates of wealthy families and dedicated the money to education. Voters subsequently rejected an effort to repeal the tax.

"If we do the right thing," Chopp said, "voters will back us."

Staff reporter Andrew Garber contributed to this report. Jim Brunner: 206-515-5628 or jbrunner@seattletimes.com

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