New tax revenue continues to pour into Washington state’s coffers, to the point where some government reform experts and state lawmakers say it’s time for a tax cut. However, others wonder if the state should use the money to reinforce its rainy-day fund to offset future revenue loss in the event of a recession.
The latest revenue forecast by state Economic and Revenue Forecast Council (ERFC) estimates that by the end of the 2019-21 biennium, the state will receive $360 million more into the general fund- state account than previously expected. In the current biennium alone, revenue will have increased by $163 million. Since 2010, revenue has grown from $29 billion to $45.6 billion.
Washington Policy Center Government Reform Director Jason Mercier says the surplus revenue calls for an ease in Washingtonians’ tax burden. “With the state Supreme Court having signed off on the legislature’s McCleary plan and state revenues continuing to increase substantially, lawmakers should now provide tax relief with a sales tax cut. When it was first imposed in 1935, Washington’s sales tax rate was 2.0%. It is currently at 6.5% and has not seen a rate reduction since 1982.”
Mercier recommends reducing the tax rate by .25 percent. “A larger sales tax cut could be enacted via a trigger mechanism tied to any large revenue increases resulting from the new U.S. Supreme Court online sales tax ruling. Combined with federal tax cuts, this court ruling will likely have a significant impact on state revenues.”
Mercier’s argument was recently cited by Senate Minority Leader Mark Schoesler (R-9) during an interview with TVW’s Austin Jenkins. “If you look at this, there’s always a hue and cry for more taxes even though revenue grows. Why don’t we take some of the growth and lower the sales tax, which tends to be the poster child for some of these think tanks that (say) your sales tax is too high?”
“Rather than new and higher taxes, why don’t we take some of this surplus and rachet that down a little bit?” he added. “But instead of talking about that we hear calls for redistribution of wealth and I think that that can hurt the capital for entrepreneurial growth in the state of Washington.”
However, other lawmakers may favor a property tax reduction to offset the cost of the McCleary solution passed by the legislature last year. In an interview with Jenkins, Senate Majority Leader Andy Billig (D-3) said any reduction to the sales tax or property tax, would also have to be considered alongside further investment opportunities such as early learning, K-12 and higher education.
Yet others caution against major spending or tax cuts without first considering a recession. As part of its economic forecasts, ERFC provides a positive and negative outlook. While some economists think the probability of a recession in the next two years is low, ERFC’s pessimistic outlook projects a loss of $475 million in general fund-state revenue in the current biennium, and a $2.8 billion loss in the 2019-21 biennium (page 37).
Washington Roundtable Vice President Neil Strege told Lens that the state should “make sure that you’re keeping an eye on potential economic downturn at some point in the future. Economic expansions don’t last forever. This one is going to come to an end sooner rather than later.”
The rainy-day fund, also known as the budget stabilization account, is intended either for governor-declared emergencies or to help plug budget gaps when revenue dips. According to the Office of the State Treasurer, there’s $940 million in the account right now. By the end of the biennium, it’s expected to have $3.2 billion. That’s seven percent of the $44 billion in spending as part of the final 2017-19 operating budget.
Strege’s advice is “let’s not get too excited. As you’re making revenue and spending decisions, just keep an eye on the fact that at some point we’re going to have a recession. You have to be prepared to deal with the consequences of not having that revenue anymore.”
While there is talk by some state officials of reducing taxes while implementing a capital gains income tax, Association of Washington Business Tax and Fiscal Policy Director Clay Hill told Lens that at the end of the day the surplus revenues “show the basic fundamentals of our tax structure is sound. We think our tax structure is working for Washington, and our strong economy is proof of that.”
“The question from AWB’s perspective is ‘what is can the lawmakers do to keep our record of economic growth growing strong, and how can we expand it to all parts of the state?’” he added. “We have historically low unemployment. That’s providing a lot of families with opportunities and hope and a sense of stability. So we should be careful about disrupting some of the magic that we have going.”