MADISON, Wis. -- Gov. Jim Doyle said Thursday that 3,500 vacant state jobs will not be filled, no employees will receive bonuses and agencies will have to cut their budgets by more than 12 percent to deal with the worst projected budget deficit in state history.

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Doyle also is backing targeted tax increases and won't rule out a general sales or income tax hike. But he said he wants to do everything possible to avoid that.

"I know that there are ways to make government run more efficiently and effectively. This is what we can do in the short term to start saving money immediately," Doyle said.

Doyle also said the state will not move forward with some grant programs and will sell 500 fleet vehicles.

Doyle directed state agencies to cut their budgets by 12.5 percent, which is 2.5 percent more than he had directed them in June.

The immediate problem is a $346 million budget shortfall this fiscal year due to drops in revenue. Doyle called that shortfall "manageable" Thursday.

"We want to make sure that we make the right choices now, that we make right choices to bring our budget into balance, (and) also make sure that Wisconsin continues to move forward," Doyle said.

A report from the Department of Administration showed tax collections are expected to fall by 2.2 percent this year and 3.9 percent next year. That, combined with spending commitments already made, will put the state $5.4 billion in the red by the middle of 2011. That is more than 17 percent of the entire budget.

Doyle said he hopes to solve the immediate problem without a special legislative session, but said he will talk to lawmakers about that. Doyle said he will decide whether to balance the budget with a repair bill or something wrapped into the next budget.

Doyle said he believes the hospital assessment and oil assessment that he proposed in his last budget could help raise revenue. He said he will also seek aid from Washington to help with the budget shortfall.

The governor said he will do everything possible to balance the budget without tax increases or major cuts to schools.

Meanwhile, Democratic leadership is emphasizing the need to grow the economy, while Republicans remain in opposition to Doyle's oil and hospital proposals.

"While Governor Doyle listed some new agency guidelines as steps to modestly reduce spending, his first legislative requests will unfortunately be tax increases. Families are struggling to make ends meet and higher taxes will make things worse," said Republican Rep. Jeff Fitzgerald, Assembly minority leader, in a statement.

The Legislature might have to meet in special session before the next budget to address the $346 million budget shortfall in this fiscal year, WISC-TV reported.