ALBANY – Substantial tax increases will be hard to avoid if state lawmakers follow a court-appointed panel’s plan to increase school financing by billions of dollars, experts warned yesterday.

The panel’s recommendations, applying only to the New York City public schools, would cost $3.25 billion in the first year and a total of more than $23 billion over the next five.

That price tag does not factor in the normal growth of some of the city’s education costs, such as transportation, and will mushroom further when extrapolated to the entire state and adjusted for inflation.

Meanwhile, Albany is facing a projected deficit of up to $6 billion in the next fiscal year, against an overall budget of about $103 billion, as well as demands for more spending on mass transit and health care.

If, as expected, Justice Leland De-Grasse of state Supreme Court in Manhattan converts the panel’s report into a court order, he will present lawmakers with a politically distasteful set of choices.

They could defy the state’s highest court, the Court of Appeals, which ruled last year that the city schools, with their high dropout rates and low test scores, aren’t providing the basic education mandated in the state constitution.

They could slash spending on everything but education, including health care and welfare for the poor and disabled, roads and bridges, public safety, and environmental protection.

Or they could raise taxes, in what is already one of the most highly taxed states in the nation.

“The question is: Will the governor appeal or surrender?” a fiscal analyst with the Manhattan Institute, E.J. McMahon, said. “Surrender will demand an immediate, significant tax increase. There is simply no two ways about it.”

In releasing its recommendations Tuesday, the panel appointed by Judge DeGrasse offered no advice as to how to raise the money, saying that was a decision best left up to the Legislature. It did warn that lawmakers should not shift too much of the cost to city taxpayers.

At this point, however, the only concrete proposal to generate revenue for education is Governor Pataki’s plan to expand the use of state-sponsored video-lottery games, which the Legislature has resisted so far. And that plan would bring in only a fraction of the necessary money, according to an analysis by the Citizens Budget Commission.

The independent commission calculated that the state could raise $2 billion through gambling and $1.2 billion by allocating less education aid to wealthier districts.

According to the court-appointed panel, however, New York City alone should ultimately receive $5.6 billion a year in additional operating aid – a 45% increase from the current level – plus $1.8 billion a year in capital funds.

“An increase of $5.6 billion annually will inevitably require a tax increase by the state, the city, or both, “the president of the CBC, Diana Fortuna, said in reaction to the panel’s report. “A tax increase would be required even if the state aggressively pursues such other funding sources as increased gambling revenues and efficiencies in school spending.”

In its own report on the issue, released Monday, the commission said lawmakers should begin by broadening existing taxes, such as the sales tax and corporate taxes, to raise additional revenue. If still more money is needed, it said, the state should consider increasing its income tax, which it said is the fairest way to raise the money needed.

Another idea buzzing around the Capitol, with no clear author, calls for “securitizing” the revenue from gambling – essentially borrowing against future proceeds from casinos and the lottery. The state already securitized its revenues from a settlement of litigation with cigarette manufacturers during a budget crisis after September 11. It’s not clear how such a scheme would help, since it would generate cash only in the short term, and the court order calls for a permanent increase in education aid that would grow over time.

The leader of the Assembly Democrats, Speaker Sheldon Silver of Manhattan, has expressed support for the panel’s recommended increase in aid for New York City schools, but he has not said where the money should come from. He did suggest that New York City should absorb about a quarter of the cost, and he called for a summit with the governor, legislative leaders, the state Board of Regents, and Mayor Bloomberg to develop a statewide plan.

“This is an obligation just like every other obligation that the state has,” a spokeswoman for Mr. Silver, Eileen Larrabee, said yesterday. “We have to find a way to pay for it.”

However, the Republican who is chairman of the Senate Education Committee, Stephen Saland, called for Mr. Pataki to appeal the panel’s findings.

“New York State already spends more on education, per pupil, than any other state in the country,” Mr. Saland said. “And now we are looking at a recommendation for an increase that would break the bank.”

The director of the watchdog group New York Civic, Henry Stern, called the situation “absurd and insupportable.” “They want $14 billion more for education added to the current state budget over four years,” Mr. Stern wrote in an essay posted on his Web site, NYCivic.org, referring to the increase in operating funds. “The problem is that their report is out of la-la land. There is no $14 billion to add to the budget.

“It is true that the school system is not educating children as well as we would wish, and in some cases probably failing them entirely. But it is not helpful to throw good money after bad,” he wrote. “Reform the schools, using what is already the largest education budget in America, rather than simply beg for even more money. Ever heard of value?”