State faces $4.5 billion budget shortfall

State faces $4.5 billion budget shortfall
After years of surplus revenue and subsequent increases in spending, the state now faces a $4.5 billion shortfall for the 2019-21 operating budget. Photo: freepik.com

The latest revenue forecast released by the state Economic and Revenue Forecast Council (ERFC) revealed what most state officials and legislators already expected: a $4.5 billion revenue shortfall for the 2019-21 operating budget due to the state-ordered shutdown due to COVID-19. Still unknown is when the legislature will begin addressing the shortfall and what fiscal approach will be taken.

Although lawmakers on the ERFC support holding a special session soon, Governor Jay Inslee told reporters at a June 17 press conference that he won’t call a special session because there’s not enough votes to “pass meaningful measures. There is not that type of agreement in either chamber to make a session productive. We can call one when it will be productive.”

At ERFC’s June 17 meeting, Senate Ways and Means Committee Ranking Minority Member John Braun (R-20) said that “we should be in special session right now discussing, or at least planning for, a special session.”

Rep. Drew Stokesbary (R-31) made similar comments in a statement, writing that: “instead of crossing our fingers and waiting for Congress to act, or raising taxes in the middle of an economic disaster, it is time for our state’s leaders to get to work. The tough decisions ahead are only going to become more complex and challenging the longer we wait.”

The revenue drop follows massive unemployment that the ERFC forecast describes as “unprecedented in its depth and speed.” The state Employment Security Department (ESD) reports that since the COVID-19 outbreak 1.2 million residents have filed at least one unemployment claim.

State Treasurer Duane Davidson last year estimated that if Washington were to experience a revenue drop comparable to that of the Great Recession, it would have to lose $2.9 billion in 2020, $3.1 billion in 2021, $3.2 billion in 2022, and $3.3 billion in 2023.

The forecasted revenue shortfall for 2021-23 could go up or down depending on how severe the recession is. Some fear it could take years for the state economy to recover, while ERFC Executive Director Steve Lerch said in a statement that “forecasting right now is clouded by uncertainty around federal interventions, global pandemic trends and how quickly the economy responds if COVID-19 wanes.”

In addition to cancelling planned pay increases for state employees and directing state agencies to reduce their budgets by 15 percent, Inslee earlier this year vetoed $450 million in the 2020 supplemental operating budget. However, the supplemental budget still increased the 2019-21 operating spending by $1 billion. Operating budget spending has increased 19 percent since the 2017-19 biennium and 59 percent since the 2013-15 biennium, with much of that increased spending in K-12 education.

It’s for this reason that Sen. Doug Ericksen (R-42) argued in a statement that “we don’t have a budget problem, we have a spending problem,” adding that even with the recession, revenue for the 2019-21 biennium will still be higher than the past two years.

“Tax dollars to the state treasury are going up, not down,” he said. “The budget-crisis narrative is being put forward by those who want big tax increases, a state income tax, and massive increases in state spending.”

Although the budget stabilization account, also known as the rainy-day fund, can provide lawmakers some money to plug spending gaps, using all $3 billion in the account would still leave a $1.4 billion shortfall. Lawmakers will also have to address a $4.3 billion shortfall the ERFC forecast anticipates for the 2021-23 biennium.

Former House Speaker Frank Chopp (D-43) recently released his own proposal that includes a capital gains income tax that would generate an estimated $500 million a year. Although Chopp said in a statement that the tax “will provide critical public purposes and bring much more fairness to our tax system,” other states that rely on capital gains revenue such as California have experienced significant revenue volatility. According to the Sacramento Bee, California’s capital gains revenue dropped from $10.9 billion in 2007 to $2.3 billion in 2009 due to the stock market crash, and the state is facing a similar revenue loss.

Also favoring a “more taxes” approach to the budget shortfall is Sen. Marko Liias (D-21), who is running for lieutenant governor, wrote in a tweet: “to solve this, we must enact new, progressive revenue that doesn’t hit working families even harder. I’ve led the fight to close abusive loopholes and demand large companies pay their fair share. We need a Lt. Governor who understands the Senate to get this done.”

Although critics of Washington’s sales tax-based revenue system say it’s regressive, S&P recently noted that the state’s tax structure has “demonstrated less sensitivity to economic cycles than income tax-reliant states.”

Braun said at the ERFC meeting that the legislature should first start to address the state budget problem by eliminating new spending. “Not cutting services at all, but new spending. It’s not rocket science to realize we’re in a hole…we should stop digging…and that should happen sooner not later.”

ERFC’s next economic meeting is scheduled for Sept. 3.

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