Gov. Jim Doyle and the Democratic majorities in the state Senate and Assembly have options to deal with the $5 billion projected budget shortfall announced Tuesday. The catch is, none of them is pretty.

Battered by a harsh economy, Wisconsin's tax revenues are projected to go down in each of the next two years — only the second time that's happened in the more than four decades on record.

To balance the state's books, officials can cut spending and with it possibly some of the services most in demand during a recession, such as health care for poor families or retraining for laid-off workers. They can also raise taxes on families or businesses already struggling to stay afloat.

Most likely, they'll do both, lawmakers and experts said.

"No one really knows the extent of the problem. I won't even venture a guess about the length of the recession," said Andrew Reschovsky, a UW-Madison economist and tax policy expert.

The biggest question Wednesday was, will the Democrats opt for a general tax increase, similar to those instituted by former Gov. Tony Earl when the state faced a similar fiscal crisis in 1983. Earl led the effort to add a temporary 10 percent surcharge to state income and corporate taxes and make permanent a 1 percent increase in the sales tax.

Adopting such a solution today would bring in roughly $700 million more in income taxes and an additional $850 million in sales taxes, said Bob Lang, director of the nonpartisan Legislative Fiscal Bureau.

But the answer to the tax question depends, in part, on how Democrats read the history of what happened next. Earl, a Democrat, lost his 1986 re-election effort to Republican Gov. Tommy Thompson.

State Democratic Party Chairman Joe Wineke, who has called for a broad income tax increase next year as a temporary solution to this budget crisis, said he didn't believe Earl's defeat was due to the tax increase. Wineke, who supported that tax increase in his first vote as a state representative, noted that he and other lawmakers who voted for it were still re-elected.

But another former Democratic lawmaker who took the same vote as Wineke disagreed, saying the tax played a major part in Thompson's defeat of Earl.

"It was practically like a legal coup d'etat," said Mordecai Lee, a former Democratic state senator in the 1980s who is now a UW-Milwaukee professor of governmental affairs.

For his part, incoming Assembly Speaker Mike Sheridan, D-Janesville, said Wednesday that any talk of possible income or sales tax increases is "way farther down the road than I'm prepared to go."

Republican lawmakers are making clear they'll oppose any tax increase this time and try to exploit it to their political advantage.

"I hope the Democrats come to their senses before it is too late," said Senate Minority Leader Scott Fitzgerald, R-Juneau, "Raising taxes in an economic slump hurts our families and kills jobs just when we need them the most."

State GOP chairman Reince Priebus said that Republicans would have to come up with their own spending cuts to avoid tax increases.

Doyle and top Democratic lawmakers say they want to preserve spending for two of the state's biggest priorities — K-12 schools and Medicaid health coverage for the poor. But maintaining the state's current commitment for those two programs alone is projected to cost nearly $800 million more over the next two years, said Sen. Bob Jauch, D-Poplar, citing figures from the Legislature's budget office.

Reducing spending on Medicaid is doubly difficult because it means an even greater loss in federal matching dollars, said Dale Knapp, research director for the Wisconsin Taxpayers Alliance. Less state spending on schools will likely mean higher local property taxes, he said.

Doyle has suggested he would seek more cuts in the administrative functions of state government that don't directly serve the public. The current budget already calls for roughly $500 million in such cuts.

Another place lawmakers and Doyle could look to help close the budget gap is previously approved tax cuts or credits that take effect in the next budget. Doyle budget director Dave Schmiedicke said Wednesday that those cuts and credits total $488 million over two years.

But the governor might find it difficult to delay or do away with those, given that he championed many of them, including $70 million in deductions on health insurance premiums and $150 million in property tax credits to homeowners and businesses.

Doyle and Democratic leaders like Senate Majority Leader Russ Decker, D-Weston, have made clear that they'll seek a $416 million hospital tax that is estimated to bring in $413 million in additional federal money, as well as a nearly $393 million tax on oil companies.

Senate Democrats and Decker have also sought to change rules that allow companies to avoid state taxes by sheltering income in out-of-state subsidiaries. Doyle has so far declined to sign onto that proposal.

Doyle's Department of Revenue has already proposed a rewrite of state sales tax rules, supported in the past by Democratic lawmakers, that would bring in $46.5 million more over two years. Jauch said lawmakers should go a step further and look at getting rid of state sales tax exemptions that range from an exemption for live game birds and shooting-range clay pigeons, worth $200,000, and for barber shops and nail salons, which excluded $28 million from the sales tax.

For some perspective

How big is the state's projected $5 billion budget shortfall over the next two and a half years? It would take cutting most of the $6.3 billion the state expects to commit to schools this year — the state budget's biggest ticket item — to make up the expected deficit.