State grappling with forecasted revenue shortfalls

State grappling with forecasted revenue shortfalls
Although expereincing surplus revenue, Washington could also expect decreased revenue from certain taxes due to recent policy changes. Photo: freepik.com

Although a new report by the state Economic and Revenue Forecast Council (ERFC) estimates state tax collections will increase $300 million for the 2019-21 biennium, the state is also likely to experience some shortfalls stemming from a less-optimistic revenue forecast for a new college investment program, a new ban on e-cigarettes and the passage of Initiative 976.

Yet some legislators say there’s still enough new money to roll back at least one tax and redirect the revenue generated by another.

Approved by voters during the Nov. 5 election, I-976 caps car tabs at $30, among other things. The state Office of Financial Management estimates the fiscal impact to state revenue at roughly $1.9 billion over the next six years; that money is primarily used for public transit projects.

The state is looking at a significant decrease in anticipated revenue that acts as the sole funding source for certain workforce education investments. During this year’s legislative session, state lawmakers passed E2SHB 2158, which imposes a 20 percent B&O tax surcharge on certain businesses to pay for higher education programs. However, the legislation stipulates that program spending must the caseload demand.

State Department of Revenue Legislative Liaison David Duvall told the Senate Higher Education & Workforce Development Committee at its Nov. 21 meeting that the direct ties between the programs and B&O tax means it “needs to be self-sustaining to ensure there are adequate resources to cover the appropriations.”

The new program might already face financial challenges. A new fiscal note shows that maintenance level spending in fiscal year 2021 will be roughly $28.1 million more than originally expected, creating a $22.8 million shortfall. On top of that, an amendment to the bill just before its passage resulted in a $164 million drop in anticipated revenue over the next four years.

“There is a significant volume of ambiguity in the bill that undermines the department’s ability to effectively and efficiently administer (it) and taxpayers’ ability to comply,” Duvall said. “It raises the question whether Section 74 (the B&O tax) can fund what it was meant to fund. We have doubts about actually collecting the revenues as estimated. We’re not saying revenues are going to be zero, but we doubt whether the revenues as estimated will come in on time.”

He added that the new tax, estimated to affect 80,000 Washingtonians, lacks simplicity. It “requires that they separately account for and match income derived from over 100 distinct activities. If a business asked us whether they should pay the surcharge or not, we essentially need to do an audit to be able to give them the predictability to know whether or not they should have to pay the surcharge. The department will do its best, but it’s going to be messy and there will be disputes.”

The state was also expecting $54 million in revenue from a new tax on vaping products, also known as e-cigarettes. However, only five percent of that revenue will be collected due to a Washington State Board of Health decision to ban flavored vape products.

Nevertheless, Senate Minority Leader Mark Schoesler (R-9) wrote in a statement that the state’s surplus revenue per ERFC’s latest report shows the 20 percent B&O tax isn’t needed. “The state has plenty of money in reserve now. We can afford to give some of that extra money back to the taxpayers while still keeping a healthy budget reserve in case of an economic downturn in the future.”

Meanwhile, Senate Ways and Means Ranking Minority Member Sen. John Braun (R-20) has proposed gradually shifting the state vehicle sales tax revenue away from the operating budget and into the transportation budget as a long-term funding solution. According to Braun, the move would provide on average $1.5 billion annually to the transportation budget over the next 20 years.

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