The recent statewide shift in major economic activity due to the coronavirus causing COVID-19 is raising questions about a possible recession, and events of late could have numerous ramifications for state budget writers when the state Economic and Revenue Forecast Council (ERFC) releases its June revenue forecast.
After years of billions in unanticipated state revenue and the subsequent increases in spending, a special session of the state legislature may be called in order to address the financial discrepancies. What remains to be seen is whether the legislature will have to make additional spending cuts in response to additional revenue shortfalls.
Lawmakers already seemed wary of an economic downturn when they approved the 2020 supplemental operating budget last week. Although the measure increases spending in the 2019-21 budget, it’s a smaller increase than what either chamber initially proposed – by several hundred million dollars.
ERFC’s latest update from March 16 shows that revenue between Feb. 11 – March 10 came in at $8.3 million – or .6 percent – below the forecast, a drop likely to pale in comparison with what’s to come, especially if businesses remained closed in the coming weeks or months.
“I expect it’s going to be monumental,” Washington Policy Center (WPC) Government Reform Director Jason Mercier said. “It’s going to be an across-the-board impact. The question is how long do these measures remain in effect?”
Also preparing for a downturn is ERFC Executive Director & Chief Economist Steve Lerch. “I was hoping to avoid a recession during my tenure. Now I’m not so sure.”
ERFC member and state Treasurer Duane Davidson said that while the business shutdown is “likely to have a pretty big impact,” he added that “it’s too early to tell” what the long-term implications will be. In a Feb. 26 op-ed, Davidson argued that a $536 million revenue surplus reported by the ERFC should go into the state rainy day fund or the general fund with the warning that “this windfall of additional revenue is a one-time event that cannot be relied upon to happen again.”
Lerch also told Lens that with regional economic downturns, “the rest of the country can at times pull others through those periods. That’s what troubles me about this (virus). This is a worldwide impact. This is hitting the entire industrialized world.”
While the historic drop in the Dow Jones may ultimately trigger a downturn, actual economic data covering the time period most impacted by the virus in Washington won’t be available for a while. The most recent unemployment figures from the state Employment Security Department are from January.
As for estimates of impact, Lerch said that “right now, we don’t really have enough additional data to make anything that wouldn’t be relatively speculative.”
He added that while major corporate employers like Boeing have tapered production, no layoffs have been announced at this point. At a March 17 press conference President Trump hinted at a likely bailout for Boeing. “Obviously when the airlines aren’t doing well, Boeing’s not doing well.”
If the June forecast does show a revenue shortfall, the state legislature during a special session could either vote to reduce spending or draw from the rainy day fund, which unless done to fund emergencies like the virus requires a two-thirds majority vote.
Deputy Treasurer Jason Richter told Lens that using the rainy day fund is unlikely to affect the state’s credit rating. “That is what these funds are for. Perhaps more importantly, what the state does after all this is said and done…is probably going to be more important.”
Yet another unknown is to what extent the federal government may intervene beyond the actions it has taken to date. The Federal Reserve has now reduced interest rates to near zero and injected $700 billion into the economy, while the U.S. Small Business Administration (SBA) is providing low-interest economic disaster loans for small businesses.
However, the state shouldn’t expect another stimulus package like it did a decade ago, Mercier said. “This is why you have your strong reserves.”
At the state level, Governor Jay Inslee’s office has set up a website for businesses affected by the closures. The state Department of Revenue (DOR) is already able to extend tax filing deadlines and provide one-time penalty waivers. According to Rep. Jacquelin Maycumber (R-7), the first SBA loans in Washington have already been approved, and House Minority Leader J.T. Wilcox (R-2) tweeted that further tax relief may be provided to small businesses based on discussions with the state Department of Commerce.
“It’s critical that we take measures to preserve our economy just as we take measures to preserve public health,” Wilcox wrote in a Facebook post.
Sen. Reuven Carlyle (D-36) wrote in a March 17 newsletter that “this crisis presents a historic change in our normal routine with many implications. Our economy – as well as each one of us, personally – is likely to experience profound consequences.”
Seattle Mayor Jenny Durkan plans to defer the city B&O tax collections for businesses with $5 million or less in annual taxable income and provide $5 million in grocery vouchers to more than 6,000 families. WPC’s Small Business Center Director Mark Harmsworth has proposed that the state defer or suspend the B&O tax “to enable the businesses to meet other expenses.”