COLUMBUS — State government will have to cut spending and possibly raise some taxes to deal with a $1 billion budget shortfall, Gov. Bob Taft warned Wednesday.

        A stagnant national economy, further wounded by the Sept. 11 terrorist attacks, will mean $500 million less in expected income and sales tax revenues this fiscal year and the next, Mr. Taft said. That could mean layoffs and program cuts at state agencies that already rolled back spending twice in the past 18 months.

Gov. Taft

        The worsening cash situation, combined with an Ohio Supreme Court order to spend billions more on schools, has handed Mr. Taft and legislative leaders a fiscal crisis not seen in years.

        A third round of budget cuts and a possible second dive into the state's $850 million rainy day fund may not be enough. Mr. Taft acknowledged an expansion of the state sales tax may be needed.

        “All I can say is we're going to look at all our options,” Mr. Taft said. “We're going to be looking at everything, like everyone else.”

        Mr. Taft would not talk about specific tax increases, which he called “revenue enhancements.” But legal and accounting services — even used car trade-ins — could lose their tax exempt status in a politically charged tussle to fill the funding gap.

        Senate President Richard Finan, R-Evendale, rejected any talk of tax hikes. He said it may be possible to make up all the state's losses through additional cuts to Ohio's $44.9 billion two-year budget.

        “The Ohio Senate is not going to raise taxes,” Mr. Finan said.

        House Speaker Larry Householder, R-Glenford, also said Republican lawmakers would reject any new taxes. Mr. Householder seemed more willing than Mr. Finan to tap rainy day funds to make ends meet.

        “We're going to have to look at the rainy day fund and budget cuts,” Mr. Householder said. “I don't think a tax increase is likely at all.”

        Also looming is a recent Ohio Supreme Court decision that requires $2.4 billion over two years to make the state's school funding formula constitutional. Mr. Taft has asked the court's seven justices to reconsider the ruling and its cost.

        “I'm not going to speculate on (school funding) until they rule,” Mr. Taft said. “Irrespective of the school funding challenge, we have a very serious fiscal problem to address.”

        Budget officials have warned of an impending crisis since August, when personal income taxes fell $100 million below projections.

        Tom Johnson, director of the Office of Budget and Management, said the attacks in New York and Washington made matters worse.

        “It's taken people off the streets and out of shopping malls and put them in their homes,” he said.

        Similar fiscal crises were recently reported in Florida, Hawaii and Nebraska state governments. Governors in each state have called special sessions to deal with dwindling tax revenues, said Arturo Perez, a budget analyst for the National Conference of State Legislatures.

        Mr. Perez said other states may soon report budget crunches. He said fiscal leaders may wait to see September revenues before ringing any alarms.

        “Nobody estimated, when they passed their budgets, that there would be a shock to the economy along the lines of what we've recently experienced,” Mr. Perez said.

        Back in Ohio, the governor's office has floated proposals to expand the state sales tax since the Supreme Court handed down its decision Sept. 6.

        One idea, taxing the value of cars used as trade-ins to buy new cars, was discussed in May. Lawmakers decided not to use it to help raise money for a $1.4 billion school funding plan.

        The Ohio Department of Taxation used to keep a list of tax-exempt services provided by lawyers, accountants, doctors, beauticians, morticians and dry cleaners. The list also included cable television and tickets to movies, theaters and sporting events.

        There are no recent estimates of how much money could be raised, but administration officials have hinted that new taxes on legal and financial services could be on the bargaining table.

        A list of budget cuts may not be available until mid-October. Already, some agency leaders say they have no money they can easily give up.

        “We're past the fat, well through the lean and close to the bone,” said Michael F. Hogan, director of the Ohio Department of Mental Health.

        Ohio prisons could suffer layoffs and consolidations, said Reginald Wilkinson, director of the Department of Rehabilitation and Corrections.

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