McKenna, Inslee: deep in budget denial

Jay Inslee, left, and Rob McKenna at a debate. Credit: State of Reform

These are challenging days for citizens who would like fact separated from fiction to further their understanding of how the candidates for governor would find the cash to fund education and other essential programs, which is perhaps the most critical issue of this election. The task is made more difficult as a torrent of competing TV ads by the candidates’ campaigns and supporters continues even after fact-checkers declare some of them to be less than truthful. Truthiness prevails.

So it was perhaps predictable that the last two debates (here and here) organized by the state’s major TV channels and The Seattle Times would see both candidates indulge in problematic numbers and less than clear answers to some pertinent questions from reporters on revenues and expenditures.

It’s hard not to conclude that Rob McKenna’s and Jay Inslee’s positions on fiscal issues have become muddled, as each tries to out-compete the other to be perceived as the one least interested in new taxes. Both are betting on government efficiencies and a recovering economy to deliver more revenues. But economic projections indicate the first comprises a relatively small factor and the likelihood of the second is slim, at least in the short-term.

The candidates were asked how they would deal with a lingering recession — with cuts or new revenues? McKenna prefaced his answer — that we need to live within our means and not ask voters for new revenue — by reciting what is now a common campaign theme: that Democratic control of the governor’s office has lead to a dramatic growth of state budgets. McKenna said the (general fund) budget has about doubled from $16 billion to $31 billion in the last 20 years. And future revenues that are projected to increase by over $11 billion over the next 8 years should be prioritized for education first.

McKenna’s historical numbers are correct but they ignore the reality that budgets grow in proportion to the needs of an increasing population, and that inflation pushes up costs. Washington has been in the top 10 of all states in population growth over the past two decades, growing 30 percent since 1993. Although inflation hasn’t been high on an annual basis, consumer costs increased 74 percent over the same period.

When the nominal budget numbers are adjusted for 20 years of population growth and inflation (using the Seattle Consumer Price Index), real growth over 10 budget cycles has been just 11 percent.

Budget growth is a composite of increases in entitlements and other necessary expenditures, plus discretionary spending decisions that can involve cuts as well as increases. A detailed analysis would reveal the exact reasons for the growth. An individual program’s share of the budget can change from one budget cycle to the next.

Much of the growth appears to be the result of the state’s partnership with the federal government for a range of safety net programs, including medical assistance and long-term care Twenty years ago federal funds accounted for 36% of the state general fund budget. The federal share of the current (2011-13) budget is 47 percent.

The most notable cuts in recent budgets have been in support of higher education. For the University of Washington and the other four-year schools, this has meant their share of the state budget has fallen from a high of about 8 percent to 3 percent, with tuition making up the difference.

And accurate future revenue projections are difficult. The state’s official forecasting agency, the Economic and Revenue Forecast Council, projects general fund revenues out four years, not eight. And they suggest that there is great uncertainty in even those numbers. In its September forecast (chapter 3, page 80), ERFC projects an increase of 7.2 percent to $33 billion in 2013-15 and another 8.7 percent to $36 billion in 2015-17. It provides no data for 2017-19 and beyond.

So it’s not possible to know if we will see a nominal $11 billion revenue growth eight years out. That growth, whatever it turns out to be, will need to fund services for a larger state population. And growth will be reduced by inflation, which is also hard to predict.

The candidates were queried on basic K-12 funding as a result of the Supreme Court’s McCleary decision. According to Gov. Chris Gregoire, it will require $1 billion in new revenue in the next biennium. And this will be only a down-payment on a much greater cost by 2017-19. The state’s Task Force on Education Funding is working with projections indicating that the price of K-12 enhancements will be at least $3.5 billion in 2017-19. The task force's mandate is to find a stable and dependable revenue source that will meet the court’s approval and 2018 deadline.

State School Superintendant Randy Dorn believes the number is higher and that some enhancements should be funded earlier. His 2013-15 budget submission to Governor Gregoire asks for an additional $4.3 billion above the current level.

Jean Enerson of KING asked both candidates how they would fund K-12 education without raising taxes, given the forecasted revenue growth. She pointed out that McKenna had previously indicated that growth above 6 percent should be directed to K-12 and higher education, but that the revenue forecast for the next biennium indicates that tax revenues will only be slightly above that number. And she questioned, citing state financial studies, Inslee’s assumption that efficiencies would produce enough revenue to meet the Supreme Court’s edict that basic education must be amply funded.

Both candidates responded that sufficient revenues will be generated to fund education, not immediately but over the next several biennia as efficiencies take hold and the economy recovers. Inslee said that significant savings will be generated by reducing health care costs.

McKenna reiterated his position that non-education funding should be capped at 6 percent growth. Inslee touted his green jobs plan to boost the economy employing limited tax credits. Not mentioned was McKenna’s plan to increase the tax credit for small businesses to $4,800 each, which would have an estimated biennial cost of $510 million.

Both indicated support for continuing generous tax breaks that Microsoft and other high-tech firms receive for investments in R & D. The Citizen Commission for Performance Measurement of Tax Preferences voted at its October meeting that these breaks, which will cost the state about $114 million in the next biennium, should be allowed to terminate on their Jan. 1, 2015 sunset date.

The candidates traded jabs on other tax issues at several points. McKenna said that Inslee’s Olympia supporters were looking to him to help move to a state income tax. Inslee replied that he opposes an income tax. Although it doesn’t generate additional revenue, the idea of school funding reform involving a swap between local and state levies produced sharp debate.

Near the end of one of the two final debates, the candidates were asked if it might be time to update our sales tax laws, which tax the purchase of items for personal use but do not tax services that employ similar items. Hair and nail salons and massage therapy were mentioned as examples. A do-it-yourself massage gadget is taxed but the service of a massage parlor is not.

Inslee and McKenna answered that we should be careful in taxing services, given that many services are provided by struggling small businesses. McKenna suggested that it might be a good idea to tax internet sales that compete with brick-and-mortar businesses. This of course is something the state could attempt, but it would be best accomplished through federal legislation designed to provide uniformity in tax policy across all states. The next governor could work with our congressional delegation to make this happen. The Department of Revenue estimates that a sales tax on internet and mail-order sales would generate almost $500 million annually.

Perhaps the most noteworthy statement of either candidate on taxes was made by Inslee at a news conference following the fourth debate. As reported by The Seattle Times, Inslee said he would veto “new taxes.” It’s not clear if this includes increased rates on existing taxes; and whether it indicates opposition to revenue neutral tax reform. For example, businesses could be taxed on the basis of net rather than gross income, and numerous tax breaks tied to the B & O should be ended.

In the remaining days of the campaign the candidates might want to consider providing voters more clarity on their tax and budget positions. But given the reality that taxation has become the third rail of state politics, we shouldn’t hold our breath.

The imperative is for the next governor to initiate an on-going tax policy review process. A committee that includes representatives of business, labor, and interest groups should be given the freedom to look broadly at all important revenue issues, including adequacy, equity, and the fiscal benefits of economic growth. It could build on the efforts of the Washington State Tax Structure Study Committee that completed its work in 2002. But unlike that committee it should be an ongoing fixture of state government, since we will be struggling to find revenues for K-12 and higher education, social services, transportation, and other essentials for some time to come.

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