State revenue projection just got $698 million worse

OLYMPIA — Projected tax collections are down. The budget shortfall is bigger. And the prospect of lawmakers reaching quick agreement on a solution is even dimmer.

The state's chief economist, Arun Raha, on Thursday projected the state will collect nearly $700 million less in taxes over the next two years than previously forecast.

That pushes the budget shortfall to around $5.1 billion or more, depending on how you count it, through fiscal year 2013. State fiscal years run from July 1 through the end of June.

Democrats say a bigger hole makes it harder to write a budget that most lawmakers will support.

"The deeper you cut, the more difficult it is to find the votes," Senate Ways and Means Chairman Ed Murray, D-Seattle, said.

Lawmakers have a lot of cutting to do, Gov. Chris Gregoire said after the forecast was released.

"There are a number of folks in the past days who've come forward and asked for an exemption from budget cuts. Now we know that is not possible," she said. "Everybody will sacrifice."

Many also will fight back.

More than 1,200 teachers, nurses and other state employees filled state Capitol steps when the forecast was released, urging lawmakers to end corporate tax loopholes instead of making more cuts to education and health care.

Some held up signs that read "Budget Woes? Don't pin the blame on the workers," and "Stop corporation greed."

"The revenue forecast just underscores the need for legislators to take a balanced budget approach, which will include closing tax loopholes and raising new revenue because our communities can't afford even deeper cuts in education, health care and the essential services that families rely on," said Collin Jergens, a spokesman for Our Economic Future Coalition, which organized the rally.

Paul Jenny, budget director for the University of Washington, said the forecast means tuition in 2011 and 2012 likely will have to increase even more than the 11 percent each year that was proposed by Gregoire to help backfill expected cuts.

Still, the school may be forced to reduce in-state student enrollment, consolidate programs and lay off hundreds of employees, depending on the level of cuts, Jenny said.

Tax collections

Tax collections are projected to increase over the next two years, just not nearly enough to maintain state services at pre-recession levels and account for inflation and population growth.

Gregoire's budget office had estimated it would cost about $37 billion to pay for everything the state would normally do, including funding two education-related initiatives that have been put on hold due to previous budget cuts. But tax collections are now expected to total about $31.9 billion.

Lawmakers anticipated that the budget shortfall would increase with Thursday's forecast.

The Legislature can make some quick fixes to cut the shortfall, such as again suspending the two education initiatives, worth more than $1 billion, and dumping state-worker pay increases.

But those moves would still leave a multibillion-dollar shortfall in the two-year spending plan through fiscal year 2013.

Lawmakers are limited in what they can do to raise more money. Voters in November approved Tim Eyman's Initiative 1053 that requires a two-thirds vote in the House and Senate, or voter approval, to increase taxes.

Some Democratic lawmakers have said there could be an effort this session to put a measure on the ballot to either raises taxes or end some tax breaks.

Trial balloons on other ways to raise money are being floated — including borrowing money, expanding gambling and resorting to an unusual accounting gimmick — to help deal with the shortfall.

Gregoire warned lawmakers against borrowing money or using a budget trick called the "25th month," which refers to using 25 months of tax collections to pay for 24 months of spending.

The governor didn't say explicitly that she would veto the proposals but noted, "When I say I don't like it, (that) means don't bring it to me."

However, Gregoire left the door open to ideas such as expanding gambling or privatizing the wholesaling portion of the state liquor system.

"I don't think you can take anything off the table right now," she said. "I think it's very clear I don't like gambling. But I'm not going to remove gambling. I'm not going to remove liquor. I'm looking at every proposal that's been brought forward to see if it's real and what the unintended consequences of it might be."

State Sen. Joe Zarelli, the ranking Republican on the Senate Ways and Means Committee, also said he might be open to certain gambling or liquor proposals as a way to increase revenue.

But Republicans remain opposed to tax increases and Zarelli maintained the budget shortfall "isn't due to a lack of revenue, it's the result of an overabundance of spending commitments.

"Unless we begin a reset of state government now, which means reforming services and programs to make them more efficient, it will remain on the same unsustainable course that created this predicament," he said.

No quick turnaround

No one is expecting a quick economic turnaround to provide relief.

The revenue forecast is down because the economy is not recovering as quickly as previously expected and the future is uncertain, chief economist Raha said.

"Recent geopolitical developments have cast yet another shadow over the economic recovery," he said. "First, we had the volatility in oil prices because of political unrest in the Middle East. Now we have the tragedy in Japan, the world's third-largest economy, and one of the state's leading trade partners. It is a fluid and fast-changing situation."

One sign of the slow growth: Raha noted that the state is still 179,000 jobs in the hole from the recession, and he projects Washington won't fully recover those lost positions until October 2013 — which is after the next two-year budget cycle.

The Associated Press and Seattle Times staff reporters Queenie Wong and Katherine Long contributed to this story.

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