A panel of retired state officials and business people convened by former GOP Gov. Arne Carlson and former Vice President Walter Mondale, a Democrat, issued recommendations Thursday on a way out of the state's budget impasse:

Cut state spending $3.6 billion, resulting in a two-year budget increase of 1.5 percent per year.

Close the remaining gap of $1.4 billion with revenue from these sources:

Increase tobacco tax by $1.29 per pack, equal to Wisconsin's rate, for $330 million.

Increase the alcohol tax for the first time since 1987, for $140 million.

Increase income taxes 4 percent across-the-board for three years, for $670 million.

Increase Human Services surcharge, $250 million.

As a long-term measure, the panel recommended broadening the state sales tax and lowering its rate.