Lawmakers end session with taxes, service cuts

OLYMPIA — Lawmakers Monday ended three months of arguing over a $2.8 billion budget shortfall by doing two things that nobody likes: They cut state services and increased taxes.

Democrats said both were needed to help close a $2.8 billion budget shortfall. Taxes on beer, soda, bottled water, candy, among others, are expected to bring in $757 million through June 2011. The Legislature also made more than $750 million in cuts, hitting K-12, higher education and other state services.

Democrats, as they headed toward Tuesday's early morning adjournment, said they had no choice in either case.

"We're faced with this difficult chore of not having the ability to make ends meet," said Sen. Jim Hargrove, D-Hoquiam.

Republicans contend tax increases are bad idea during a recession and argued more should have been done to streamline government and deliver services more efficiently. The GOP already is looking forward to the November elections and predicting trouble for Democrats who control the House, Senate and governor's office.

Sen. Don Benton, R-Vancouver, predicted a voter backlash for Democrats. "I think the Legislature has lost its credibility, and I think you're going to see that reflected in the elections coming up," he said.

Benton is running this year to unseat Democratic U.S. Sen. Patty Murray.

The biggest hurdle for Democrats, as the end of the 30-day special session approached, was getting the tax increases approved. The Senate narrowly approved the most contentious tax bill Monday by a 25-21 vote. The House approved the measure over the weekend.

The tax bill now heads to the governor, who is expected to sign it.

Senate Majority Leader Lisa Brown, D-Spokane, said the taxes are needed to avoid cutting too deeply into state services. "We're balancing our budget and doing the responsible thing by not sending out IOUs to state employees, by not sending kids home from schools and teachers layoff notices," she said.

House Minority Leader Richard DeBolt, R-Chehalis, issued a statement decrying the budget as "the epitome of all that is wrong in Olympia. It prioritizes state government over struggling families and employers."

Among the taxes approved by the Legislature:

... A business-and-occupation tax surcharge that would raise about $242 million by increasing the B&O tax paid by service businesses, such as doctors, lawyers, accountants and hairdressers, from 1.5 to 1.8 percent. There are exemptions for hospitals and research and development. A tax credit for small businesses would be doubled.

... New taxes on the portion of business some out-of-state companies do in Washington state would raise about $85 million. Those taxes would mainly hit banks and credit-card firms.

... Taxes on beer, soda, candy and bottled water would bring in more than $150 million combined. The tax on mass-market beer would levy an additional 50 cents per gallon, or 28 cents per six-pack. Microbreweries would be exempt from the increase. The tax is projected to raise about $59 million. The soda tax of 2 cents on each 12-ounce can or bottle would raise $33.5 million.

The B&O surcharge and the taxes on beer and soda would expire in June 2013.

In related action, both the House and Senate approved a roughly $31 billion budget that calls for more than $750 million in spending cuts but also taps reserves and uses federal funding to deal with the shortfall.

The budget now goes to Gov. Chris Gregoire.

The budget cuts millions from K-12, higher education and other state services. It directs state agencies to save around $50 million through furloughs or other pay reductions for some state employees.

For K-12, the budget cuts mean $120 million less for the state's public schools. Education advocates say those cuts, on top of the ones made last year, are going to hurt.

Lawmakers, for example, eliminated $79 million in funding for the class-size reduction initiative, I-728.

"That was one of the last pots of discretionary money that districts had," said Dan Steele of the Washington State School Directors Association.

The budget cuts $73 million from the budgets of the state's universities and community colleges.

"We've been preparing for this," said Randy Hodgins, the vice president of external affairs at the University of Washington. "Nobody is happy about the cuts, but there are no eleventh hour surprises, either."

Republicans aren't the only lawmakers complaining about the budget and taxes.

Sen. Rodney Tom, D-Bellevue, vice chairman of the Senate Ways and Means Committee, voted no on the budget and tax measures.

"I think we could do better. I think we have an obligation to do better," he said Monday morning. "We owe the citizens the best that we can do."

Staff reporters Nick Perry, Linda Shaw and Jim Brunner contributed. Andrew Garber: 360-236-8266 or agarber@seattletimes.com