On Wednesday, legislative budget writers received new information clarifying just how big of a budget problem they face over the next three years.
According to the latest state revenue forecast, state tax collections through 2023 will come in about $8.8 billion below previous estimates.
Even if the Legislature uses all of the state's reserves — about $3 billion — it won't be nearly enough to cover the shortfall. The budget hole could grow even larger in the coming months, if the economy continues to suffer under the COVID-19 pandemic.
Now, Democrats who control the Legislature are debating how much to cut spending — and whether it is time to pass new tax measures targeting high-earning businesses and the wealthy.
Top Democratic leaders have said they expect they will have to approve some combination of spending cuts and new revenue to solve the budget crisis. That is likely to happen in a special session sometime later this summer or in early fall.
“Everything is on the table right now,” said state Sen. Christine Rolfes, a Democrat from Bainbridge Island who is the lead Senate budget writer.
With any new tax measure, however, there is always the danger that voters could reject it at the ballot box in November. In Washington, if citizens gather enough signatures, they can put a referendum or an initiative on the ballot, allowing them to roll back measures approved by lawmakers.
That’s what happened in November 2010, when 60% of voters rejected taxes the Legislature had passed earlier in the year on candy, soda and bottled water.
Also in 2010, 64% of Washington voters rejected a ballot measure that would have imposed an income tax on high earners, while simultaneously reducing property taxes.
More recently, voters also rejected two versions of a proposed tax on carbon emissions — first in 2016 and again in 2018.
Even before the current virus-induced economic crisis, Democrats had been unable to pass some of their preferred revenue measures during the past three years. A tax on capital gains, such as profits from selling stocks and bonds, didn’t come up for a floor vote even with Democrats in control of both legislative chambers and Democrat Jay Inslee in the governor’s mansion.
But some think the crisis forced by the pandemic, combined with an influx of newer and more progressive lawmakers in recent years, may finally cause that to change.
Many legislators say they don’t want to repeat the severe budget cuts of the Great Recession, which severely affected higher education, social services and many other aspects of state government.
“In 2009, I was not in the Legislature,” said state Rep. Debra Entenman, D-Kent, “But I ran for the Legislature in 2018 to undo many of the things that were done in 2009.”
“I don’t want us in the future to have to do what we’ve done in the past, because we thought we needed to go into austerity measures,” Entenman said. “I really think now is the time for a change in our regressive tax system. I think we need a capital gains tax.”
State Rep. Noel Frame, a Seattle Democrat, leads a work group that is examining ways of restructuring the state’s tax code. Much of the group’s work focuses on making the system less regressive — meaning less reliant on sales taxes, which can cause lower-income people to pay a higher share of their income in taxes than the wealthy.
For some policymakers, the economic fallout from the coronavirus crisis has caused “a sudden epiphany that the tax code is really broken,” Frame said last week.
“And it’s like, welcome to the conversation,” she said.
Top Republicans reviewing Wednesday’s revenue forecast said they don’t think now is the time to enact new taxes, given the state of the economy and the challenges businesses are already facing. “Many of them will not survive, and the ones that do survive will be right on the edge,” said state Sen. John Braun of Centralia, the ranking Republican on the Senate budget committee.
Yet many Democrats — both inside and outside the Legislature — say there are plenty of businesses and individuals who can afford to pay a little more.
“In the state where you have two of the largest corporations in the world — and the billionaires to go with it — there are certainly the resources to make it happen,” said state Sen. Joe Nguyen, D-West Seattle.
In addition to passing a capital gains tax, Nguyen would like to see the Legislature adopt a new tax on employers that pay people salaries in excess of $1 million per year. The tax would be paid by the companies themselves, not by the employees, he said.
State Rep. Frank Chopp of Seattle, the former House speaker, has also released a plan to tax businesses that pay high salaries.
Another Democratic senator, Liz Lovelett of Anacortes, said the idea of cutting services to the state’s most vulnerable populations is “unconscionable” right now. She said she is drafting a bill that would increase the estate tax on estates valued at more than $3 million, while lowering the tax for smaller estates. She also wants to explore the option of an inheritance tax to help raise revenue, she said.
At the same time, Lovelett said, those types of tax measures ultimately would need to be accompanied by reductions in taxes elsewhere.
Ensuring that lower-income and middle-income families don’t end up paying more is one way to guard against backlash at the ballot box, such as a possible referendum effort, she said.
If the Legislature gets it right, Lovelett said, “hopefully, they will appreciate our efforts to reduce their tax burden.”
Some proponents of business and wealth taxes say that’s an easy case to make to voters. Civic Ventures, a liberal think tank founded by venture capitalist Nick Hanauer, said his group's recent polling found voters favor a capital gains tax and taxes on wealthy households to help “kick start the economy and support workers and families.”
“There is a voter appetite for asking the wealthiest to pay their share,” said Heather Weiner, a Democratic political consultant working with Civic Ventures and other groups to look at tax options.
At the same time, Weiner said, passing a traditional income tax “would be very difficult,” partly because of potential legal challenges.
Randy Pepple, a Republican political consultant, said he wouldn’t put much stock in Civic Ventures’ polling data, especially when it comes to predicting the outcome of a referendum effort.
“There's always a cohort of voters that will say, ‘Oh, you're going to tax rich people — I'm not a rich person yet, so yeah, that's fine.’ ” Pepple said.
“But then after you run a campaign and you say, ‘Oh yeah, we're defining rich as you,’ then all of a sudden people go, well, hold on just a second. ... And it always falls apart,” he said.
Alex Hays, another GOP political consultant, said Washington voters in the past have viewed the economy as an ecosystem in which taxing someone else can end up affecting them, too.
He said he doesn’t think voters have changed their minds about that.
“The economic harm of increasing taxes affects the whole economy, not just the person who pays it on the front end,” Hays said.
In any case, it looks unlikely that lawmakers would try to solve the entire budget shortfall by passing new tax measures. House Speaker Laurie Jinkins, D-Tacoma, has said that even if lawmakers approve a capital gains tax immediately, it would take about 18 months for the revenue to start coming in, still leaving an immediate budget problem to solve.
Robert Cruickshank, president of Washington’s Paramount Duty, a group that supports progressive revenue options to pay for education and other services, said he would rather see the state borrow money to solve that problem in the short term.
“I don’t know that they need to do any cuts,” said Cruickshank, also a member of the state Democratic party’s central committee.
Some budget reductions, however, already appear underway.
On Wednesday, Gov. Jay Inslee said he was canceling a planned 3% raise for about 5,600 state employees who aren't part of a union.
About 40,000 state employees will also be required to take furlough days “at least through the fall,” the governor’s office said Wednesday.
Still, Rolfes, the Senate budget writer, said an all-cuts budget that doesn’t look to new sources of revenue doesn’t make sense during the current pandemic.
“... We cannot recover the economy until we have the virus under control — and that requires spending money,” Rolfes said.