Governor Gregoire has unveiled a $605 million tax package as part of a cut-and-tax plan to close a yawning $2.8 billion budget gap.

The Democratic governor is steering clear of the Big 3 (sales, property or business and occupation taxes), and proposing higher taxes on smokes, candy and gum, soda pop, bottled water and oil products.

The cigarette tax hike would be a buck a pack (to $3.05 total state tax per package, generating $89 million.) The pop tax would be a nickel for each 12 oz.  The new bottled water tax of a penny an ounce would be imposed at the wholesale level, raising $135 million a year.  Extending the 6.5 percent state sales tax to candy and gum would generate $28 million. Raising the tax on petroleum products would raise $148 million for the state treasury and more for local stormwater projects.  Gregoire also supports closing tax loopholes on some out-of-state companies operating in Washington.

In a letter to legislative leaders, Gregoire said:

“As difficult as the choices are, I believe we must address this year’s gap with a balance of cuts and revenue. … The task ahead may appear daunting,  but I believe we can work together to get the job done.”

Gregoire also proposed that legislators cut $967 million from the budget and tap reserves and fund balances to the tune of $677 million.  She said passing a bill to re-impose a tax on out-of-state companies would halt the loss of $154 million due to a new state Supreme Court ruling called Dot Foods.

The governor also said the state can safely presume that Congress will appropriate another $435 million for Medicaid matching funds for Washington.

Over the strenuous objections of minority Republicans, the Democrats are sending the governor a bill to suspend the requirements of Initiative 960 for a two-thirds vote in both houses for tax hikes.  Instead, the Legislature will need only a simple majority in both chambers.

The House held hearings on the petroleum and pollutants tax, called the Clean Water Act of 2010, Wednesday. The Senate is expected to release its budget early next week.

The regulation 60-day session must expire by March 11.