Gov. Butch Otter said he will try to spare education as much as possible as he and the Legislature fashion a budget bound to include some of the most drastic cuts seen in Idaho in years.

In a speech to the Associated Taxpayers of Idaho's annual meeting, Otter told the business group that investing in education is critical to economic growth.

"The intellectual property that you have is sitting around in a classroom somewhere today," Otter said. "So yeah, we've got to make some cuts. And yeah, I've already made some cuts, and I've been pretty careful about how much we damage that future."

Otter sharply criticized a proposal by a North Idaho Democratic lawmaker to impose a 5 percent surcharge on middle- and higher-income taxpayers to raise about $45 million to help plug a budget gap that stands at $39 million and appears to be growing.

Otter said a stable tax system is vital to giving businesses the certainty they need to invest in research, development, buildings, equipment and employees. Investors, Otter said, want a tax policy "that's predictable, one that's not changing all the time."

He said he didn't support a tax hike to get through these rough times.

"One thing you should not expect is a tax increase," said Idaho's Senate Majority Caucus Chairman Russ Fulcher, R-Meridian, in remarks before Otter's. "I simply don't see that happening. There's not the appetite for it in the Senate, there's not the appetite for it in the House and there's not the appetite for it in the governor's office."

Instead, Fulcher said, there will be discussions of consolidating state agencies and local school districts. Otter gently chided Fulcher for revealing such details.

Before Otter's speech, his budget chief, Wayne Hammon, told the group that most Idahoans will have to wait until the governor's Jan. 11 State of the State Address to learn more about the restructuring plans.

"I think you'll see the elimination of programs and the elimination of whole departments," Hammon said.

But Otter outlined his guiding principles. He said he's asked his Cabinet to examine the duties of their agencies five or six years ago, choosing that benchmark because Otter expects revenues to drop to 2003-04 levels.

"We've got to right-size government in Idaho for the 21st century," Otter said. "We've got to redefine the proper role of government and the proper role of those agencies in government."

He spoke of expanding user fees, citing the model of the departments of Transportation and Fish & Game, which don't receive general-fund dollars from sales and income taxes. Instead they are paid for by entirely by targeted fees such as fuel taxes, vehicle registration fees and hunting and fishing licenses.

"Those agencies which should be self-sufficient, agencies which every taxpayer isn't getting a benefit from - an absolute, direct benefit - then those agencies we need to look at and say, 'You know, you've got to be more self-sustaining.' "

Otter made it clear he wasn't talking about K-12 education, however, citing the Idaho Constitution's provision for free and common public schools.

As for a tax increase, Otter critiqued the proposal by Rep. Shirley Ringo, D-Moscow, for a temporary tax increase for Idahoans with taxable incomes over $50,000.

"I resist the effort to start class warfare," Otter said, noting that he pays the same 7 7/8 percent rate on his $100,000 salary as someone who makes $30,000. "Those who are successful ought to be celebrated and rewarded."

Otter scoffed at the notion that a temporary surcharge would really go away. "Putting a new tax on is like getting a tattoo, folks - you don't get rid of that easy and without some serious trauma."

Last week, Otter warned agency directors to prepare for more holdbacks this year and asked them not to fill vacant jobs except in cases of emergency. Otter already has ordered $99 million in holdbacks and current estimates say the current budget is still $39 million in the red.

Otter also is eyeing selling state assets - including timber and buildings - to realize one-time revenue to get the state through the crisis, Hammon said. And, Hammon said, Otter may try to privatize some state services.

Hammon predicted state employees will not get pay raises in fiscal 2011 and will see additional efforts to cut benefits. Health benefits have already been reduced.

Hammon had one other piece of bad news that he said Otter will reveal in January: The projected revenue for the 2010 budget year, which ends in June, will likely again be revised downward.

"We will release the new number and it will be - I'm guessing - smaller again," Hammon said.

This year's revenue forecast has been revised downward several times - from $2.66 billion in December 2008 to $2.55 billion in February and the $2.38 billion in September.

After a fiscal year 2009's 15.3 percent decline in revenue, the current official estimate for 2010 shows a decline of 3.6 percent.

Dan Popkey: 377-6438