Prospects for a sizable tax increase hover in the background as state lawmakers converge on Olympia this week to begin grappling with an expected $6 billion budget shortfall.

Budget writers in the House and the Senate say it’s too soon to talk about raising taxes and that there are no specific proposals yet because the budget picture is likely to change by March and April. That’s when the Legislature will finalize a spending plan for the next two years.

But Democrats, who hold majorities in both chambers, also have made it clear they’re not going to accept all the deep cuts that Gov. Chris Gregoire, a fellow Democrat, proposed last month in her no-new-taxes budget for 2009-11.

Senate Majority Leader Lisa Brown, D-Spokane, and House Speaker Frank Chopp, D-Seattle, said some of the governor’s cuts to children’s health care and programs for the most vulnerable aren’t acceptable.

“We will be looking broadly at alternatives,” Brown told reporters last week. That means different spending cuts as well as alternatives to cutting so deep. And that means raising more money somewhere.

“We don’t rule that out, but it’s not where you start,” she said. “In and of itself, a tax can have a de-stimulating effect on the economy.”

Any tax increase most likely would have to be approved by voters, because Initiative 960 requires a two-thirds vote in the Legislature, or a public vote, to boost taxes. Although Democrats have hefty majorities – 62-36 in the House, 31-18 in the Senate – they can’t pass a tax hike by themselves. Republicans aren’t likely to help them, and many of their own members would balk at such a vote.

SUPPORT GROWS

Advocates say raising taxes is better than cutting services, and the ill effects of higher taxes for the poor could be offset by giving them a small rebate.

“Tax increases will be necessary in order to avoid the negative economic effects of deep budget cuts,” members of the Washington State Budget and Policy Center wrote in a policy report in November. “Social supports like health care and housing assistance boost household budgets. When these investments are cut, there is a dollar-for-dollar reduction in economic activity, which only serves to weaken the economy more.”

The policy center recommended a temporary increase in the state sales tax, noting that a boost from 6.5 percent to 7 percent over two years would generate $1.1 billion. That recommendation came at a time when the state looked to be facing a $3 billion deficit. The estimate has since doubled.

The Washington State Labor Council last week also made a call for some additional revenue to stave off some of the worst budget cuts.

“We’re hoping there can be some type of package that we can sell to the people,” said Rick Bender, Labor Council president. If the deficit gets worse, “you’re talking about extremely deep cuts to programs that people rely on.”

Rep. Ross Hunter, D-Medina, chairman of the House Finance Committee, said the timing and packaging of any tax increase depends on two huge variables: how much money the state gets from the federal government and how much worse the state’s own tax collections get.

The Finance Committee oversees tax policy – both increases and cuts – so its members would have a hand in designing any tax proposal this session.

There is some talk that President-elect Barack Obama and Congress might give the 50 states a total of $200 billion to help them deal with their respective operating budget deficits. Based strictly on population, Washington’s share would be about $4 billion, Hunter said.

“Let’s say we get $4 billion from the feds,” Hunter said. “Then, we cut $1.5 billion and go home.”

On the other hand, if federal help isn’t forthcoming, isn’t so high or if the state’s budget situation worsens, then work on a state tax package would begin in earnest, he said.

Gregoire’s budget already assumes Washington will get an extra $1 billion from Congress. Otherwise, her cuts would have been even deeper.

Congress is likely to act by February. In mid-March, the Legislature will get an updated report on state tax collections.

“The decision point is in March,” Hunter said. “That’s when you’ll know what the cuts actually look like and you’ll know how much money you have coming in. Now, that doesn’t mean you don’t think about the parts (of the tax package) ahead of time.”

Legislative leaders from both parties expect the $6 billion shortfall to worsen.

“I think our problem is going to be closer to $7 billion,” said Sen. Joe Zarelli of Ridgefield, top Republican on the Senate budget-writing committee.

That $7 billion would be more than 20 percent of the estimated $32 billion the state expects to collect in general taxes over the next two years.

VOTERS WOULD DECIDE

Historically, when Democrats have been in charge in tough budget times, they’ve closed the gap between tax collections and spending in three ways: one-third spending cuts, one-third new taxes and one-third by taking money from other funds or other one-time fixes.

That’s what they did in the early 1990s and again in 2002.

If that holds true this time, the Legislature might look to craft a tax package in the neighborhood of $2 billion. That’s how much could be raised over two years if the state sales tax were increased by 1 cent per $1 purchase.

“No one has told me to draft that yet,” Hunter said of the state sales tax.

When Gregoire introduced her budget plans in mid-December, she told reporters she didn’t expect the Legislature to send her a bill that would raise taxes. She said a tax hike might further dampen the economy. But the main reason she won’t see a tax proposal is because lawmakers most likely would refer the matter directly to voters, as required by Initiative 960.

Brown has challenged I-960 and I-601, its tax-limiting predecessor, saying the Legislature should be able to raise taxes with a simple majority vote. That case was filed last spring and is still awaiting a decision by the state Supreme Court. It’s unknown whether the justices will make a ruling before the Legislature adjourns, or whether they will strike down the supermajority requirement for taxes.

The Legislature does have the authority to raise fees with a simple majority vote, and that includes authorizing tuition increases at state colleges and universities. But that doesn’t begin to raise enough money to address a multibillion-dollar shortfall. For instance, a 10 percent tuition hike at all six universities and 34 community colleges in each of the next two years would raise less than $250 million.

Bender said organized labor, whose members would be the foot soldiers for any tax measure on the ballot, wouldn’t support reimposition of the state sales tax on food. And proposals to extend the existing sales tax to professional services – such as lawyers, doctors and architects – would generate too much opposition.

The budget policy center wants lawmakers to take a close look at eliminating some of the 100 tax breaks passed by the Legislature between 1995 and 2007. Combined, they’ll cost the state $1.6 billion in the 2009-11 budget period, the center says.

“They range from property tax assistance for the widows of veterans that will cost the state budget $40,000 … to a sales tax exemption on manufacturing machinery that will cost $450 million,” the center’s report said.

TIMING THE QUESTION

Timing is another matter.

The session begins Monday and is scheduled to adjourn April 26, and the Legislature is free to put a tax referendum on the ballot anytime it wants. And since lawmakers aren’t required to pass a balanced budget, they might put something on the ballot in the spring or wait until the summer or the general election in the fall.

The state’s next budget cycle begins July 1, 2009, and runs through June 30, 2011. Theoretically, the Legislature could pass a budget that assumes voters in November will give them an infusion of money for the final 18 months of the 24-month budget period. If not, they’d come back in January 2010 and make the cuts they didn’t make the first time around.

To mount a successful campaign, the new taxes would have to be earmarked to restore state funding to colleges, nursing homes and hospitals, Olympia insiders say. Those are the areas of the budget that are supported by the businesses that have the money to help finance a tax referendum campaign.

House Minority Leader Richard DeBolt, R-Chehalis, said he’s afraid the Democrat majority will craft budget cuts in a way that makes it easier to win voter approval for new taxes.

“I’m worried they will cut education and (programs for) the developmentally disabled – the things that are painful – and keep all their pet projects in place and send all the cuts to voters with a tax increase,” DeBolt said. “They need to take responsibility.”

Said Rep. Gary Alexander, R-Olympia, top Republican on the House budget committee: “Let’s just take the option off the table. If revenue stays on the table, it will just keep us from taking the steps we need to take. And they will be just as tough in April as they are in January.”

Joseph Turner: 253-597-8436

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State tax revenue falls worse than expected

Tax payments into the state general fund in December and January fell 9.4 percent, or $97.5 million, below a November estimate, the state Economic and Revenue Forecast Council reported late Friday.

The total amount received was $943 million.

Revenue Act receipts from Dec. 11 through Jan. 10 – which primarily reflect November business activity – were 13.9 percent below the amount collected for the same period a year ago.

The latest year-over-year decline is the largest since the current Revenue Act reporting format was initiated in January 1989, the council said.

C.R. Roberts, The News Tribune