Vowing that "everyone is going to have to share in the sacrifice," Gov. Jim Doyle proposed increasing taxes on smokers and the wealthy, holding school and university spending by the state to modest increases and cutting dozens of state offices to close a more than $5.7 billion budget hole.

Doyle on Tuesday laid out a two-year $62.7 billion spending plan that he said keeps education, health care and middle-class families from being swamped by the recession.

To do it, the Democratic governor proposed using $2.1 billion in federal aid signed into law by President Barack Obama Tuesday, releasing some felons from prison early and raising the state’s cigarette tax by 75 cents a pack.

In the biggest bombshell of a grim 34-minute speech, Doyle proposed creating a new tax bracket for the wealthiest 1 percent of Wisconsinites and raising their taxes by $312 million over the next two years.

"Everyone is going to have to have some faith that, if we all work together, we get through this in a way that will make us stronger in the years ahead," Doyle said in his last budget address before he may seek re-election in 2010.

The tax increases and spending cuts came on top of others that Doyle and lawmakers announced last week in a first round of budget fixes already working its way through the Legislature. They come at a time when the state faces arguably its greatest economic crisis since the Great Depression, with tens of thousands of families coping with job losses.

Republicans such as Rep. Robin Vos, R-Caledonia, said the income tax increase would strike at small business owners who already have difficulty maintaining or creating jobs.

"I don’t understand why the governor is resorting to class warfare to balance the budget," said Vos, the top Assembly Republican on the Legislature’s budget committee. "But those are the very same people we want to invest in the economy."

Boosted by federal stimulus dollars, Doyle’s budget calls for a 7.4 percent increase in total state and federal spending. But the proposed spending from the state’s main account actually drops by 1.7 percent to $27.9 billion over 2010 and 2011. It would leave the state with $270 million in reserves.

The budget includes a host of major proposed changes:

• Cutting $900 million from existing agency budgets, including a 1 percent across-the-board cut, and rejecting $1.8 billion from the amount those agencies sought in new spending. The cuts include closing three dozen Division of Motor Vehicle offices, two state trooper stations and 25 Department of Natural Resources offices and cutting state staff at welcome centers for tourists.

State employees would avoid large layoffs and furloughs but the amount of state jobs would shrink by 209 to 69,038 by June 2011.

• Levying $1.4 billion in new taxes and fees, including a tax on oil companies of $544 million. That includes increasing the income tax rate on spring 2010 returns by 1 percentage point to 7.75 percent for single filers earning more than $225,000 a year and married filers earning more than $300,000. The proposal would also lower the state’s exemption for capital gains taxes from 60 percent to 40 percent, raising up to $95 million.

• Providing $426 million more in mostly federal money for K-12 schools over two years, a move Doyle said was essential to holding down property taxes. The budget would hold funding for the University of Wisconsin System essentially flat, leaving universities to manage rising costs through tuition increases, new efficiencies or service cuts.

• Delaying the statewide expansion of the FamilyCare program that provides long-term care to the elderly and disabled. Doyle also dropped his BadgerChoice proposal to hold down insurance costs for small businesses.

• Provide some legal protections to same-sex domestic partners, including allowing them to take workplace leaves to care for each other, to make end-of-life decisions and visit each other in the hospital, and to inherit property, autos and life insurance benefits. It would let state workers, including UW-Madison employees, add their partners to state health insurance coverage at an undisclosed cost Doyle aides described as modest.

• Authorizing a Madison-area transportation authority that could levy an up to 0.5 percent sales tax to fund initiatives such as commuter rail. The authority would cover just Madison and its suburbs rather than all of Dane County, which was proposed by local leaders in 2007. The budget also proposes authorizing a total of $120 million in state borrowing to extend high-speed passenger rail from Milwaukee to Madison.

Dane County Board Chairman Scott McDonell said any sales tax increase would need to go to a referendum in the affected areas.

McDonnell said the provision would revive the region’s federal application for a $250 million commuter rail system between Middleton and Sun Prairie. The county’s previous application was withdrawn because the state hadn’t authorized a funding source.

The 75 cent cigarette tax increase follows a $1 hike in January 2008, raising the state tax to $2.52 per pack — and bringing in an additional $290 million over two years. That would make Wisconsin’s tax on smokes the third-highest in the nation, although a number of other states are considering increases of their own.

Doyle also proposed a statewide ban on smoking in public places, with both the ban and the cigarette tax increase taking effect roughly two months after the budget is passed.

Maureen Busalacchi, executive director of Smoke Free Wisconsin, praised both moves. She pointed to estimates from the Campaign for Tobacco-Free Kids that the proposed state increase, along with a federal increase of 61 cents scheduled for April 1, would prevent 33,000 children in the state from becoming addicted smokers.

Doyle’s speech came just hours after Democrats on the Legislature’s budget committee passed by a party-line 12-4 vote a budget repair bill that helps close more than $700 million of the state’s overall budget gap through June 2011. It does so through tax increases and taking money from agencies through spending cuts and other measures.

Lawmakers ditched a proposal to allow only the two co-chairmen of the budget committee — both Madison-area Democrats — to sign off on Doyle’s plans for spending federal stimulus money for state infrastructure projects. Under the change, the entire budget committee would do so.

Contact Jason Stein at jstein@madison.com or 608-252-6129; contact Mark Pitsch at mpitsch@madison.com or 608-252-6145. State Journal reporter Matt DeFour contributed to this report.