Budget negotiators plod ahead.

Byline: DAVID STEVES The Register-Guard

SALEM - House and Senate negotiators met with Gov. John Kitzhaber on Thursday night in hopes of forming the outline of a plan to close a $482 million state budget shortfall.

The options continued to include a combination of increased income taxes, cuts in spending, and borrowing.

"They're going, but slowly," Kitzhaber spokesman Tom Towslee said. "They're difficult issues; borrowing, cuts, taxes. It's just a matter of how much of each."

With similar reports of plodding progress from Democratic and Republican participants, it became clear that the latest special legislative session wasn't about to wrap up.

House Speaker Mark Simmons, R-Elgin, predicted that the session would go into the weekend.

House and Senate leaders had scheduled today's floor sessions for 4 p.m., with the expectation that they might be able to adjourn sometime tonight. But after Thursday's second negotiating session ended about 7:30 p.m., Simmons said adjournment late tonight or early Saturday "isn't in the cards."

A Democratic negotiator, Sen. Peter Courtney of Salem, said a weekend adjournment of the session, which began Sunday, was unlikely. "We're going well into next week," he predicted.

Simmons said to avoid disrupting election preparations, lawmakers need to decide by Sunday or early Monday whether to put an income tax increase measure on the Nov. 5 general election ballot.

Although Republican leaders are treating their willingness to discuss increasing taxes as a major concession, they've also been trying to leverage agreements from Democrats on future tax cuts and reform of the financially troubled Oregon Public Employees Retirement System.

Rep. Rob Patridge, R-Medford, said efforts to include PERS reform in the negotiations, along with a cut in the capital-gains tax rate and eliminating the inheritance tax, have helped smooth over a growing rift between moderates and conservatives in the GOP.

"I think the Republicans are sticking together to get what we can out of the deal, including PERS reform, capital gains and the death tax. Those are the three issues," Patridge said.

Moderates have been pushing to make a deal that includes a tax increase to prevent deeper cuts in education, public safety and human services - and to do so without going deeper into debt by borrowing on the bond market.

Conservatives have adamantly opposed any tax increase.

Simmons said tax cuts and PERS reform remain on the negotiating table. But Courtney said they haven't received much discussion and the lawmakers and Kitzhaber are dealing almost exclusively with what he called "the famous three" issues of tax increases, borrowing and budget cuts.

Both lawmakers said the second negotiating session didn't yield any specifics but produced a set of options they and other negotiators can take back to their caucuses today to see what mix of the three options has the best chance of passing the two chambers.

A nonpartisan analysis released Thursday indicated that reducing the capital gains tax rate to 4 percent from 9 percent would cut state revenues by $245 million, while eliminating the tax altogether would drop revenues by $466 million.

Eliminating the inheritance tax would reduce state revenues by $90 million, the analysis showed.

The same report also laid out how much money the state would capture through different tax-raising scenarios.

A 5 percent income tax surcharge would raise $501 million for the 2001-03 biennium. The addition of a new 11 percent bracket for joint filers with incomes of $80,000 or more would raise $580 million.

Those and other big increases would provide more than enough money to cover the $482 revenue shortfall that surfaced last week, bringing the total biennial revenue gap to $1.7 billion.

Because negotiators are looking to use tax increases to close only a portion of the revenue gap, smaller rate increases have been most prominently discussed. A 1 percent surcharge, for example, would raise $100 million.

Efforts to tie any vote on taxes to reform of the state pension system were dealt a setback when the Senate failed, on a 15-15 tie vote, to pass a bill to eliminate PERS and replace it with a "defined contributions" retirement plan similar to 401(K) plans.

All but two Republicans - Sens. Verne Duncan of Milwaukie and Lenn Hannon of Ashland - voted for the bill's passage while every Democrat except Sen. Mae Yih of Albany voted against it.

The bill had been pushed by Senate President Gene Derfler, R-Salem, as a way to make sure the Legislature didn't raise taxes, or ask voters to do so, without first trying to fix a pension system he said will cost state and local governments $270 million in higher contribution rates because of the stock market decline.

Although it was defeated, the bill was referred to a committee where it could be reworked.

WHAT'S NEXT

Gov. John Kitzhaber and legislative negotiators meet at 11 a.m. to continue private budget talks.

The House and Senate both convene floor sessions at 4 p.m.

CAPTION(S):

BRIAN DAVIES / The Register-Guard Sergeant at Arms Tom Mathews pushes in the chairs of lawmakers after the House quickly adjourned Thursday to await budget negotiations. WHAT'S NEXT Gov. John Kitzhaber and legislative negotiators meet at 11 a.m. to continue private budget talks. The House and Senate both convene floor sessions at 4 p.m.