In our state, the governor must submit a balanced budget to the Legislature. That means government spending must equal tax collections. Unlike Congress, we cannot borrow or print money.

Gov. Chris Gregoire has to rebalance the two-year budget passed by the Legislature last spring because revenue is $2.6 billion short of what lawmakers appropriated.

Even though the governor called last year’s budget “ugly,” this year’s plan will likely be even more unsightly. That has prompted the governor to announce she will also submit an alternative budget that includes both spending cuts and tax increases.

Last year, Steve Mullin, president of the Washington Roundtable, warned, “We think it’s become clear that the significant increase in state spending over the past four years is simply not sustainable. We will have a multibillion-dollar shortfall to deal with.”

And now it’s here.

Recognizing the heavy toll this deep recession has taken on businesses and families, the governor says she wants to avoid higher taxes that send our fragile economic recovery into a tailspin. She doesn’t want to throw more people out of work, add more costs onto struggling merchants or deter companies that would invest in new products, expand production or modernize facilities in Washington.

That is a daunting task! So how can the governor and the Legislature plug the revenue hole, keep people working and not kill the recovery?

First, there are no easy answers to raising taxes, hiking permit fees and adding more costs to businesses and families has a lasting and damaging impact – especially in a recession.

Second, enact policies encouraging the private sector to create jobs here.

For example, the sales tax exemption on manufacturing machinery and equipment has added $81.5 billion to state coffers in its first 10 years, generated more than $16.5 billion in income and created almost 285,000 jobs. State and local governments are expected to realize $2.1 billion in additional net tax revenues between 2007 and 2016.

Third, take additional steps to eliminate redundancies and make government more efficient. The governor is already making some inroads with her 21st Century Government Reform initiative, guided by an advisory group that includes representatives from the business community.

Her executive order signed this week eliminated 17 boards and commissions, and she’s drafting legislation to eliminate nearly 80 more.

Fourth, as difficult as it will be to rebalance the state budget in 2010, it will be even harder in the 2011 budget when $3 billion in federal stimulus money disappears. By then the budget gap could triple heading into the 2011-2013 budget cycle.

Fifth, the governor and lawmakers must lower costs to employers through reforming workers’ compensation, holding the line on higher unemployment benefits and resisting the temptation to soak employers with higher “fees” that are little more than backdoor tax hikes.

Finally, and probably most difficult, the governor and Legislature must look at compensation for state workers. Just as many private employers continue to agonize over cutting work hours, freezing wages and requiring people to pay a bigger share of their benefits; government must do the same just to survive and not further harm our shaky recovery.

Gov. Gregoire rightly points out that each statistic in the state budget represents a real person. Similarly, each tax and fee hike also takes money out of the pockets of a real person — the taxpayer – who is struggling to get by.

The decisions will be gut wrenching, but these are hard times. There is no magic wand, only hard choices.

Don Brunell is the president of the Association of Washington Business.