According to a recent four-year outlook from Washington’s Economic and Revenue Forecast Council (ERFC), Governor Jay Inslee’s 2017-19 operating budget would take about $11.3 billion in new or increased taxes in the next four years. This figure was confirmed by Office of Financial Management (OFM) Communications Director Ralph Thomas. The Governor’s $11 billion smack to taxpayers would include new taxes on carbon, and income from capital gains, and an increase in the state business gross receipts tax.
It all amounts to a sharp departure from Inslee’s 2016 campaign, which downplayed new taxes. The total tax hike would be even higher than that shown for the operating budget. One indication is that half of the carbon tax’s estimated $1.8 billion in revenue during the 2017-19 biennium, would be allocated to Inslee’s proposed capital budget.
Forecast: $2B In The Hole By ’21
Despite the deep reach into the pocketbooks of major and mid-sized employers, small business owners, workers and families, the same ERFC report also projects that Washington’s so-called “Near General Fund-State, and Opportunity Pathways Account” would end up $2 billion in the hole by 2021. Though quite sizable, the $2 billion deficit by 2021 would be considerably less than the $7.4 billion projected in ERFC’s November outlook.
ERFC also forecasts a $596 million deficit in the budget stabilization account, known as the “rainy day fund.”
OFM officials warn that the 2021 deficit could turn out to be less, if additional revenues flow into state coffers from greater than expected economic growth. On the flip side, some state lawmakers say Inslee’s tax appetite would inhibit growth.
Rossi: Don’t ‘Snuff Out’ Small Biz Startups
State Sen. Dino Rossi (R-45), Vice Chair of the Senate Ways and Means Committee, said the added tax burden could snuff out small business startups. “What about the girl around the corner who uses her life savings to start a nail salon?” he said. “It’s hard enough to be in business,” but it’s all the more difficult “to have your government working against you.”
Rossi became Ways and Means Chair in 2002, when the state faced a $2.7 billion deficit. The legislature was able to close that gap without increasing taxes.
Business Tax Burden Already Great
Washington State ranks eighth in the nation on business tax revenue growth between fiscal years 2014 and 2015, according to a new policy brief from the nonpartisan Washington Research Council (WRC). The WRC policy brief noted that Washington businesses currently pay 58 percent of state and local taxes.
Inslee’s proposed 2017-19 budget includes a gross receipts, or business and occupation (B&O) tax increase from 1.5 to 2.5 percent, (while raising the B&O tax filing threshold to $100,000); plus a $25 fee on every metric ton of carbon emissions; and a 7.9 percent tax on income from capital gains earned via sales of stocks, bonds and other investments.
Suspending The Balanced Budget Rule
In its outlook, ERFC noted that Inslee’s budget “assumes” the four-year balanced budget requirement that currently exists under state law, will be suspended. Democratic-sponsored HB 1438, moved at Inslee’s request, proposes doing that during the 2017-2019, 2019-2021, and 2021-2023 bienniums. It has been referred to House Appropriations, but no public hearing has been scheduled yet.
The recent ERFC outlook on Inslee’s budget is likely to become grist for Senate fiscal hawks such as State Sen. John Braun (R-20). He has said the governor’s tax strategy – intended in large part to shift local K-12 education costs to the state, as required by a court ruling – would hurt state job growth. He is the chair of Senate Ways and Means.
The sentiment is shared by Rossi, who told Lens that Inslee’s 2017-19 biennial budget proposal “looked like a non-serious effort,” because it relies on tax proposals “he couldn’t get off the Democratic-controlled House floor.”
Taxes Would Cause “Bow Wave” For State
Rossi said Inslee’s budget would create a “bow wave” effect because new spending occurs immediately, while many of the taxes to pay for it kick in later. He added that is why the four-year outlook stipulating that spending match projected state revenue, is necessary to prevent budget “gimmickry.”
However, the four-year outlook’s revenue figures aren’t written in stone, says OFM Assistant Budget Director Jim Crawford. He told Lens that “the revenues are going to change widely over four years.”
“The value of the outlook is to take a long term approach…understanding what the fiscal outlook could be,” Crawford said. “The danger is you start making short, immediate decisions off an outlook that can be maybe quite uncertain four years from now.”
HB 1438’s language argues for suspending the four-year balanced budget requirement in order to meet the financial obligations of the K-12 classroom size reduction measure Initiative 1351, approved by voters in 2014.
The initiative would take effect in 2019–21. If fully funded, it would increase spending by more than $1.8 billion, although Senate Majority estimates are now higher, based on Inslee’s proposed 2017-19 budget. Senate Majority Leader Mark Schoesler (R-9) has emphasized that his coalition is strongly opposed to implementing I-1351 beyond K-3.
Crawford said “it’s too early in the process to predict” how far HB 1438 will go. “That is a very much an endgame decision,” he said.
Bipartisan Effort to Expedite Forecasts
The ERFC outlook arrives as state lawmakers battle over funding priorities. As the House adopted its 2017 legislative session rules on Wednesday, January 25, Republicans proposed an amendment that would have required basic education funding be signed into law before any other appropriations are approved. The proposal was rejected in a 50-48 vote, with lawmakers such as House Majority Leader Pat Sullivan (D-47) opposed.
“Without a full budget, how does that impact our homeless students, our foster youth, those who are struggling with health care and nutritional issues?” And most important, how does it impact blue collar districts like mine? It is about more than just that education budget,” Sullivan said.
The fight could spur state lawmakers to move up the timeline for ERFC’s quarterly forecasts, in order to make funding decisions earlier in the session. SB 5114 would do just that, requiring quarterly revenue forecasts by February 20, in all years. During odd-numbered years, when biennial budgets are drawn up by lawmakers, those forecasts are not due until March 20. This can delay and complicate the already contentious budget-making process.
SB 5114’s prospects seem bright. Introduced by Braun, the bill’s sponsors include Ways and Means Ranking Minority Member Sen. Kevin Ranker (D-40), and Assistant Ranking Minority Member Senator Christine Rolfes (D-23). It was approved by the panel majority January 18 and is now in the Rules Committee.
The idea is in no danger from Inslee’s veto pen, said Crawford. “The Governor’s got no problem with that proposed change.”
The bill also failed to garner criticism by panel members or testifiers at a January 17 public hearing in Ways and Means. That indicates “this is not a controversial topic,” Braun said at the hearing. “Hopefully, we can pass it all the way through so we have a consistent, earlier forecast in the future,” he added.