Gov. Christine Gregoire.

OLYMPIA, Oct. 26.—Gov. Christine Gregoire, on her way out after eight years in office, offered a warning to the two candidates who hope to succeed her: You can’t balance the budget without new taxes.

“I think we just have to be honest with the public,” she said during a meeting with reporters in her office Thursday. “I’m trying my best to be exactly that. You can’t get there on a credit card. You just can’t get there, guys.”

It is an argument that puts her in the rather ticklish position of criticizing her own party’s nominee for governor, Democrat Jay Inslee, as well as Republican Rob McKenna. Both of them are saying they can balance the budget without raising taxes. But Gregoire says neither one of them has a plan that adds up, and in her wide-ranging news conference she outlined precisely where thinks they are wrong.

“There is absolutely no question in my mind,” she said. “They can’t do it.”

Just to get the conversation going, Gregoire said she will propose a tax increase before she leaves office – details to be named later.

Pox on Both Candidates

The new element Thursday was Gregoire’s criticism of the two candidates’ no-tax promises. There’s never been any doubt where she stands on tax increases. Since January she has been saying that the 2013 Legislature will have to consider a tax hike to pay for the state Supreme Court’s  landmark McCleary decision. The ruling, which held the state isn’t spending enough on K-12 schools, will force at least $1 billion in additional spending in 2013-15 at a time when the state is strapped for cash. Gregoire says the state faces a $1.1 billion deficit even before the McCleary spending is considered – an arguable point. But clearly she says the state is going to run short by a billion or more.

It should be noted that Gregoire doesn’t use the deadly T-word herself. Instead she says “new revenue” will be necessary – and that technically could mean other sources of money. If Congress imposes sales taxes on Internet sales, for instance, the state might pick up a half-billion dollars without imposing a tax increase of its own. But Gregoire said it is hard to imagine any other source that could come anywhere close.

“I am not running for office,” she said. “I have my candidate. His name is Jay Inslee. Make no mistake about it. O.K., now set that aside. I am telling both candidates I don’t know how you meet your obligation for McCleary without looking at new revenue, and I have said that from the time the McCleary case came out.  I have never fudged on it. I don’t see it, and I say it to both candidates.”

There’s a big difference between running for office and actually doing the job, she said, and she’s learned plenty during the last four dire years. “I am a realist as to what you can do and what you can’t do,” she said.

Says Inslee is Wrong

Start with Inslee: He is saying the state can find the money by putting “lean management” techniques in place, closing tax loopholes, cutting state medical costs, and launching a jobs-creation program that targets high-tech and clean-energy industries.

Gregoire said those ideas won’t produce the kind of money the state will need. Take medical costs. The purpose of Thursday’s news conference was to announce a new state effort to coordinate medical programs for those Washington residents who are eligible for both Medicare and Medicaid. It is expected to save $14 million over the next five years. The thing is, it has taken eight years to get the feds to budge. You can’t expect other big savings in medical costs to occur in the next two years, she said. “It ain’t going to happen overnight.”

Then there’s lean management. Gregoire said she has worked to put lean-management principles in place herself, demanding that all state agencies embrace private-sector techniques to improve government efficiency. But at best she said lean is likely to stretch existing resources and make it possible to maintain current programs. It won’t generate huge amounts of new money, “not over the next two years. I’m working on the 13-15 budget, and I am not booking $1 billion in savings because of our implementation of lean.”

And closing tax loopholes? It’s a political nightmare. Every tax incentive has a constituency ready to fight for it. Add to that the Legislature’s two-thirds vote requirement for tax increases and you get an unwinnable battle. “If you think you’re going to get $1 billion, you’re not.”

Says McKenna is Wrong

As for McKenna’s rather different plan, Gregoire says that doesn’t pencil out, either. McKenna is banking on the natural growth of state tax revenues. He would cap the growth in spending on all state programs to three percent a year, and direct anything above that to education. Gregoire said, “If you look at the growth for the next biennium, it is not even six, so holding it at six doesn’t do you any good.”

Actually, the state’s latest revenue forecast projects growth next biennium of 8 percent, a considerably higher number. McKenna also is using a different starting point. Although the governor’s Office of Financial Management is projecting a non-McCleary deficit for 2013-15 of about $1.1 billion, the estimate includes all spending plans currently on the books, some of which might be trimmed. The figure also doesn’t take into account a half-billion dollars in the state rainy day fund, which might be used to offset the shortfall.

But Gregoire offered an additional criticism: Six percent allows for inflation, but not for growth. And it’s going to be hard to say no when demand for state services begins growing again. “So you want my guys at the Department of Corrections to say, I’m sorry, we’re at our cap, no more room at the inn?”

Capital Gains Tax?

Gregoire said she will offer a revenue proposal of her own when she presents her final budget to the Legislature – after the election, of course. Exactly what will be in it, she’s not saying. But when asked if it will include a state capital-gains tax, one of the hottest topics at the statehouse these days, Gregoire said, “Nothing is off the table. I think it would be derelict on my part to take anything off the table at this point. So I have my Department of Revenue researching every conceivable revenue package. It is just premature for me to go any further than that, because I’m being honest with you, I have no idea today.”

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