On Wednesday, when legislators wrapped up this year’s second special session and adjourned for the holidays, they left one question unanswered: Is the state's current short-term revenue shortfall actually the prelude to a much bigger fiscal problem, one that can no longer be ignored? A close look at Washington’s shaky finances shows we need to talk seriously about what revenues will be needed over the next few biennia to fund essential programs, and about how those revenues can be equitably collected.
Gov. Gregoire called the special session hoping the Legislature would act on her proposed all-cuts supplemental budget, and on a temporary half-percent sales tax increase. That measure would have generated an estimated $500 million in the next three years, enabling the state to buy back roughly one-third of the program cuts.
Neither goal was met. But the Legislature got a start on crafting a revised biennial budget to deal with the $2 billion shortfall that's materialized since it adopted the budget in May. Legislators who often cling to partisan dogma were able to agree to $480 million in deficit reductions through a combination of fund transfers, expenditure delays, and cuts. And they surely vetted other options in closed-door discussions, which should speed deliberations on the remaining cuts in the 60-day regular session that convenes January 9.
But this bipartisan achievement comes with one large caveat: Most of the revisions involve what one legislator called “picking low-hanging fruit,” and such fruits require close inspection. Some are just bookkeeping gimmicks. Several generate only one-time revenues. For example, the state can now sell unclaimed property such as stocks and other securities when it's practicable, rather than waiting up to 3 years. Clearing the backlog is expected to garner $51 million.
Other changes merely delay budgeted expenditures. School bus funding scheduled for July 2013 was pushed back one month, “saving” $50 million. The implementation of an expanded list of factors that may be considered in detaining and committing mentally ill persons was postponed from January 2012 to July 2015. This will reduce costs by $23 million in the current biennium and $30 million in the next, but then the new standards will kick in.
Some big-ticket items the governor proposed were left for the regular session that begins January 9. These include cuts to K-12 levy equalization, school-year length, higher education, public safety, and health and human services, and a shift of school-district apportionment payments to the next biennium. Likewise the question of a sales-tax increase to buy back specific cuts. The talk now is of trying put this before the public in April, but the Legislature would have to take quick action in January, perhaps even before the rest of the supplemental budget is finalized.
Much remains uncertain. Some legislators want to see “reforms” before revenues. But the reforms proposed range across the map, and each could generate considerable debate. One, extending slot machine gambling to non-tribal casinos, already has.
Some significant revenue sources may not be available in the next biennium. In its December 2010 special session, the Legislature raised the business and occupation tax rate for several service industries, including real estate brokers and gambling parlors. This increase will generate an estimated $483 million in the current biennium, but it's scheduled to end in June 2013,
That same session passed the state’s first business-tax amnesty program. Businesses owing B & O, public utility, or sales and use taxes due before February 1, 2011, were allowed to pay the balance without penalties or interest. This added $284 million to the general fund, but it's also largely a one-off.
Two impending federal actions will affect state taxes and, perhaps, the willingness of voters to raise them. Congress is once again debating whether to let state sales taxes be deducted from the federal income tax. The deduction, if extended, would be worth $450 million annually to Washington taxpayers.
Congress is also considering letting states tax so-called remote sales — online and mail order sales to their residents by out-of-state firms, a rapidly growing share of all retail sales. The state’s chief revenue forecaster estimates this would bring in $370 million annually. The Legislature, in its just-completed session, formally asked our congressional delegation to support swift adoption of this permitting legislation.
In addition to the general fund, another state budget needs a revenue fix. The transportation budget, which funds the maintenance and upgrading of state highways and bridges, relies largely on gas tax revenues. These have declined as drivers switch to more fuel-efficient vehicles and reduce driving to manage tight family budgets. And the state ferry system is also cash-short.
A task force appointed by Governor Gregoire has recommended a number of revenue sources that would raise $2 billion per year over the next decade to fund a range of transportation needs. The Legislature would decide which revenue sources would go to voters and when. A vote next year would obviously be problematic, since it would compete with the governor’s proposed sales tax increase.
There are many moving pieces in the state’s revenue puzzle. The governor and Legislature need to involve the public and the business community more closely in discussions of budget priorities and revenue needs.
Most importantly, we should again look at comprehensive reform of a tax system that is by several measures unfair and dysfunctional. Washington still has one of the most regressive tax systems in the country; people at the bottom of the income scale pay a disproportionate share of state and local taxes, and people at the top get off easy. Sales taxes receipts, which constitute half of state revenues, continue to decline in relation to personal income. And tax breaks that deplete revenues persist even when the evidence shows they are ineffective or overly generous.
The budget shortfalls are likely to continue until we provide revenues sufficient to support the programs and services that reflect our core values.