OLYMPIA – Gov. Christine Gregoire proposed a state budget Monday that would increase spending on health care and education while paying part of the tab with higher taxes on smokers and the wealthy.

“This is about values. This is about what I believe in,” Gregoire said upon release of her $25.8 billion budget that relies on a shuffle of the state’s fiscal cards in order to erase the projected $1.5 billion deficit in the next two years.

As expected, the budget funds the voter-approved initiatives for smaller classes and teacher raises that had been suspended for two years. The budget calls for 6,600 new enrollment slots in two-year and four-year colleges and converting branch campuses in Tacoma and Vancouver into full-fledged universities.

Gregoire’s plan pays for state worker raises negotiated in collective bargaining and boosts dollars for mental health care, community clinics and the Basic Health Plan. She also restores health coverage for children of undocumented immigrants.

“If Washingtonians really value education and their children and giving them an opportunity, I know they’re going to stand by me,” the governor said.

The controversial piece will be taxes. Gregoire insisted for weeks that she wanted a budget with no new taxes and her budget writers did just that Thursday.

Early Friday she decided “that wasn’t good enough for me,” she said. “I came in on Friday and upset the apple cart, and I’m really glad I did. You have all reminded me time and time again that I promised no general tax increase. I lived up to my commitment.”

Senate Minority Leader Bill Finkbeiner, R-Kirkland, said that while he thought a no-new-taxes budget could have been written, he was happy to see Gregoire didn’t propose to raise business and occupation, property or sales taxes.

“By and large I applaud the fact that she decided to invest in education and in higher education and to make it a priority in this budget,” he said. “I think it’s the right thing to do.”

There are targeted taxes.

The inheritance tax, which would exempt family farms and apply to estates valued at more than $2 million, would net $129.4 million for the budget.

The cigarette tax is a 20-cent-a-pack increase and would raise $73 million – with half earmarked for college enrollments and financial aid to offset tuition hikes.

Much of the balance in Gregoire’s budget comes from shifts of existing dollars.

She delays a $524 million payment to the pension fund, freeing those dollars for general operations. She also adds to the general fund with $412 million in transfers from other accounts.

Her proposed list of cuts and savings total $466 million.

That includes $27 million through reduced reimbursements to nursing homes. And Gregoire’s budget maintains the controversial two-year-old bed tax.

“I was disappointed that she didn’t address the bed tax,” said Sen. Mary Margaret Haugen, D-Camano Island. “I’m not going to vote for anything that doesn’t deal with that bed fee.”

The budget also predicts $36 million can be saved by steering nonviolent, non-sex offenders out of state prisons and into home incarceration and community residential programs with drug and alcohol treatment.

Rep. Kirk Pearson, R-Monroe, questioned that approach.

“I am concerned by how many people they are going to throw in the streets before their sentences are completed,” he said.

Gregoire briefed senior Democratic and Republican lawmakers on her proposal at a breakfast meeting Monday. She termed their reaction “positive and stoic.”

Rep. Gary Alexander, R-Olympia, ranking member of the House Appropriations Committee, said he’s concerned by transfers that he termed “one-time grabs.”

“It does not clearly define where the money is coming from and where it is going,” he said. “This is not a sustainable budget. How can you have a legacy if you keep fighting this deficit issue every two years?”

Gregoire acknowledged her plan does not fix structural problems blamed for this year’s deficit and the shortfalls since 2001. Like this year, budgets get balanced in large part through shifting dollars between funds.

She urged legislators to join her in a serious attempt to revamp the state financing structure. Without change, she said, only economic growth will prevent another deficit in two years.

Jason Mercier, budget analyst for the Evergreen Freedom Foundation, sharply criticized the shuffling of dollars.

“She said getting by isn’t good enough,” he said. “Playing with the numbers is not only not good enough, it’s unacceptable.”

Also Monday, Gregoire issued her capital budget for the biennium that starts July 1. It directs $2.8 billion to projects from salmon restoration to new college campuses.

Next Monday, Senate budget writer Sen. Margarita Prentice, D-Renton, will release the Senate Democrats’ proposed operations and capital budgets. Also next week, the House of Representatives will issue its proposals.

April 24 is the last scheduled day of the session.

The Associated Press contributed to this report.

Reporter Jerry Cornfield: 360-352-8623 or jcornfield@heraldnet.com.