WA's state budget forecast grew $762M despite recession worries

State lawmakers use the projections to parse funds for schools, prisons, parks and social services. But will the economic dip affect their blueprint?

A picture of the Capitol building in Olympia.

The Washington State Capitol and Supreme Court buildings, photographed from Heritage Park on Wednesday, Oct. 21, 2020, in Olympia. (Jovelle Tamayo/Crosscut)

When the state budget forecasters look at the economy, they see the uncertainty of the present moment: rising inflation and interest rates, global fallout from Russia’s invasion of Ukraine, tech company layoffs, potential railway and dockyard strikes and a slowing housing market.

Meanwhile, Washington’s projected tax collections have continued to roll in higher than expected.

The numbers released Friday by the Washington State Economic and Revenue Forecast Council provide key information as state lawmakers and Gov. Jay Inslee prepare to write a new two-year state budget. That spending blueprint funds schools, parks, prisons, public lands, the state’s mental health system and other social services.

Overall, projections for the current two-year budget cycle came in almost $762 million higher than expected, according to the council. The state is also projected to bring in about $681 million more than anticipated for the coming 2023-2025 budget cycle – the budget lawmakers and Inslee are tasked with drafting during the legislative session that begins in January.

That sets up the Democratic-controlled Legislature and Inslee with roughly $66.2 billion for the coming two-year budget cycle, which begins next July. Lawmakers are likely to consider more education spending, mental health services and ways to address Washington’s housing affordability crisis, among other issues.

In Friday’s council meeting, lawmakers and others expressed cautious optimism – but they’re not convinced revenue growth will last. Steve Lerch, director of the forecast council, pointed to rising interest rates, concerns about a recession, and layoffs by technology companies like Amazon and others, which could potentially hurt growth.

“We still do believe that things will slow down,” Lerch added later.

State revenue projections are improving partly due to strong collections in the state’s sales and Business & Occupation taxes. But just as in the City of Seattle, the state homesellers’ tax is coming in a bit below expectations as the housing market starts to cool.

“I think this revenue forecast is better than I had anticipated,” said Rep. Timm Ormsby, D-Spokane and chief Democratic budget writer in the House. Still, he described the future as uncertain.

It’s been a chaotic few years as the COVID-19 pandemic snarled supply chains and forced people to stay home from jobs or school, either by government mandate or personal necessity for health reasons.

Still, Washington’s quick economic rebound since a steep drop-off at the beginning of the pandemic – along with federal pandemic aid dollars – have allowed lawmakers to increase spending on a slew of programs. In the spring of 2021, the Democratic-controlled Legislature and Inslee passed the current two-year state operating budget that spends roughly $59 billion. Even with the pandemic recession, that robust document spent roughly $5 billion more than the previous two-year budget.

Even as lawmakers return to draft the new budget, some of the existing blueprint remains up in the air. Early next year, the Washington Supreme Court is expected to hear a legal challenge to the law that created a 7% tax on the capital gains of the sales of assets such as bonds and stocks above a $250,000 threshold. If the court strikes down that tax, lawmakers may have to scramble to plug holes in anticipated future spending.

Meanwhile, the economic watchword of the moment – inflation – was on everyone’s tongue Friday. Inflation is potentially driving up some tax revenues, according to one budget official – and also the costs of running state government. Two Republican lawmakers also cited the rising costs of gas, groceries and other goods as a reason to provide tax relief for state residents.

Rep. Ed Orcutt, R-Kalama, pointed to rising inflation and rising property taxes as a reason to give back some tax dollars.

“Somewhere in here we have got to figure out some sort of tax relief,” said Orcutt. “Because we’ve got a lot of people suffering out there, property taxes have gone up.”

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