An additional $760 million in hoped-for state revenue evaporated in the latest economic forecast, and lawmakers began talking up the pros and cons of tax increases to help plug a budget shortfall now estimated at $2.7 billion.

Gov. Chris Gregoire’s budget director, Victor Moore, said the latest news makes it more difficult to close the budget gap and that spending cuts would be deep and “extremely ugly.”

“I said last time (that) everything is on the table. I think I need a bigger table now,” Moore said.

Majority Democrats including Sen. Rodney Tom of Medina gave indications that they are more willing now to look at tax increases when they return to Olympia on Jan. 11 for a 60-day session. Gregoire has said she would listen to tax proposals, but Republicans quickly warned that taxes could backfire by harming businesses at a time when jobs are desperately needed.

Sen. Joe Zarelli of Ridgefield called tax increases a gamble and again called on lawmakers to convene early in December to begin looking for ways to deliver state services less expensively.

State revenue forecaster Arun Raha said in his quarterly report to the Economic and Revenue Forecast Council that a slow-to-recover economy will generate $760 million less in state revenue than he predicted just two months ago.

“The good news is, the economy is finally recovering. The bad news is that revenue is not,” Raha said, estimating that the drop in revenue has totaled $5.3 billion since February 2008. The recession, as defined by economists, began in late 2007 and ended in the third quarter of this year.

Personal incomes in the state are improving overall, but consumers still aren’t spending, instead putting money into savings accounts and paying off debts, Raha said. Jobless rates and gasoline prices are the most influential factors for consumer confidence, and, he said, “To me it seems like the consumer’s mindset is stuck within the band of pessimism at recessionary levels.”

But he repeated previous predictions that the state’s recovery will outperform the national recovery, propelled by the state’s trade-reliant economy, once it kicks in.

Because 70 percent of the already-allocated budget for 2009-11 now is off-limits, cuts would fall in the areas not protected by the constitution, such as basic education. Also, state-funded programs such as the Basic Health Plan for low-income workers and the General Assistance Unemployable category are at risk.

So are some class-size-reduction funding for public schools, financial aid for universities, and programs in natural resources and corrections.

Republicans including Zarelli and Rep. Ed Orcutt of Kalama said the state needs to look at changing the way it delivers services. Orcutt said businesses laying off workers cannot afford additional tax burdens and will lay off more people if costs of business go up.

Orcutt said the state also needs to look at how it is paying state workers, suggesting some are paid too much.

But Democrats were ready to open the door to discussions of tax increases. Sen. Craig Pridemore, the Vancouver Democrat who served as the chairman of Thursday’s Economic and Revenue Forecast Council meeting, said that for him, taxes are on the table because of concerns that needed services would have to be cut for those who can‘t find work.

Tom, the vice chairman of the Senate Ways and Means Committee, said cuts need to be balanced by new revenue such as sin taxes. He mentioned a cigarette tax he has proposed before that might bring in $70 million to $80 million, as well as a candy tax.

Rep. Ross Hunter, D-Medina, said cuts could require the state to try reopening pay contracts with state employees in a search for reductions. Employees are working under contracts that have no cost-of-living raises in 2009-11. The same contract changes could come to local school districts if the state has to cut funding for public schools that is tied to pay and is not protected by the constitutional requirement to fund basic education, Hunter said.

Tom said some obvious programs that will be considered for cuts are the Basic Health Plan and General Assistance Unemployable, which the Governor’s Office and Republicans also have mentioned as vulnerable.

But Remy Trupin, director of the Washington State Budget and Policy Center, said in a statement that it would be a “sound policy judgment” to balance cuts with new revenue. He quoted national economists as saying tax increases can be less harmful to families and state economies than deep cuts to services.

The forecast shows that lawmakers will have about 3.3 percent less in revenue to work with in the 2009-11 budget than they did in the preceding two years. Zarelli said a spending binge by Democrats in 2005 and 2007 made that problem worse, but Gregoire said in a statement that the state has “not seen a shortfall like this in 80 years.”

Thurston County Rep. Gary Alexander, the House GOP’s top voice on the budget, wants lawmakers to consider turning the state’s liquor-sales monopoly over to the private sector. In a statement, he said, in part, “We either make significant changes to state services and how they are delivered now, or we pay dearly in the future.”

Brad Shannon: 360-753-1688

bshannon@theolympian.com

www.theolympian.com/politicsblog