Governor candidates need to fact-check their own assumptions about revenue growth

Both Jay Inslee and Rob McKenna are campaigning on the idea that they can avoid new taxes simply through growth in the state's revenue. But the wannabes might want to listen to Gov. Gregoire.
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Congressman Jay Inslee.

Both Jay Inslee and Rob McKenna are campaigning on the idea that they can avoid new taxes simply through growth in the state's revenue. But the wannabes might want to listen to Gov. Gregoire.

The governor’s race between Jay Inslee and Rob McKenna is increasingly focusing on the need for new revenues for education, transportation, and other essentials, and where the revenues will be found. Both candidates are betting on a recovering economy to generate more state revenue without major changes to the existing tax system.

They differ on how the economy can grow with Inslee emphasizing support for green industries, and McKenna highlighting the need to rein in burdensome regulations. Their economic and job creation platforms are obviously more detailed and can be found here and here.

But to the extent that both candidates are relying on economic growth to help replenish the state’s coffers, citizens need to listen carefully to claims the candidates make about the growth that can be expected. There will be a tendency for the candidates to exaggerate on the high side.

And neither wants to be seen as someone who would impose additional taxes. This is in spite of Gov. Chris Gregoire’s strong advice to them that the economic growth alone, at least in the short term, will not produce the revenues needed to meet obligations and avoid further painful cuts to the social safety net.

Because McKenna has been so far the more explicit in making optimistic revenue predictions going into the next few years, let's focus on him for the moment. In a TVW interview, he said that the state budget office is expecting revenue growth to average 9.2 percent over the next two biennial budget cycles. This, he said, indicates that the budget will double in 16 years. It would if the growth is as high as he believes. Unfortunately, it’s unlikely that it will be.

McKenna first needs to understand — or remember — who does the state’s revenue forecasts. Then he should sharpen his pencil. The state budget office (i.e. the Office of Financial Management) doesn’t make revenue forecasts. That’s the job of the state’s Economic and Revenue Forecasting Council (ERFC). The council's most recent forecast in February indicates that state general fund revenues will grow over the next two years but at rates significantly less than stated by McKenna.

ERFC’s February forecast pegged 2013-15 nominal revenue growth at 7.1 percent. The growth rate was adjusted upward to 7.4 percent by the subsequent passage in the special sessions of legislation with revenue impacts. When projected inflation and population growth are taken into account, real growth is 3.0 percent.

ERFC has not yet forecasted revenues for 2015-17. The council's next quarterly revenue forecast will be available June 20.

Although the differences in these numbers may appear small, the revenues the state can expect to collect compared to revenues produced by a 9.2 percent growth rate will be less by about $1 billion.

Lest either Inslee or McKenna be tempted to forget, $1 billion is the amount Gov. Gregoire has cited as needed in the next budget to just begin to meet the state’s obligation, now under Supreme Court scrutiny following the McCleary decision, to amply fund basic education. She reaffirmed that figure and the need for a new source of revenue last week when she spoke to the annual meeting of the Washington Education Association.

Moreover, ERFC always cautions that there are both upside and downside risks that could affect the economic recovery and tax receipts. Their February forecast indicates that the downside risks to the two-year revenue outlook remain high and exceed the upside risks by a wide margin. These are factors outside of our control and they include the European debt crisis and possible hostilities involving Iran.

The continuing gridlock in the other Washington is yet another. And even if the next election changes the political equation and Congress rediscovers the art of compromise, there is the looming deficit and debt reduction issue that could have a major impact on states' revenues. Washington state’s current general fund budget is dependent on the federal government for almost half of its revenues.

It’s imperative that the candidates use the best information available when they say how they will pay for programs and services. Revenues from economic growth will be part of the equation. But will they be enough? Gov. Gregoire doesn’t think so, and she’s had eight years of hard experience to back up her position.


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About the Authors & Contributors

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Dick Nelson

Dick Nelson is a former Washington State legislator. He currently contributes to the public debate on state and local fiscal issues through research and commentary. As when he was in the legislature, he prefers the Democratic Party.