State revenue picture is better than you might think

Published in The News Tribune December 2, 2010

Despite front page doom and gloom on the state budget front, my column last week argued that things aren’t quite so bad.  Sure in the weeks ahead, we’ll suffer more budget cuts as the projected revenue for the rest of the fiscal year is once again falling short of what was previously forecast. .

But looking ahead, the Office of Financial Management (OFM) is forecasting record revenue for the next biennium – a full 16 percent above revenue expected this biennium.   By comparison with these last two years, the next biennium sounds like a piece of cake.  Perhaps with the exception of Tacoma’s City Manager, who among us wouldn’t  leap for joy if told that our income was going up 16 percent?

Sixteen percent isn’t such good news, though, if we also knew that with it we now had to finance a parent in a nursing home, two kids in college, and three grandkids we were now raising.  In other words, the question to ask is not how much does the state have, but how much does it have relative to the demands placed on it?

And this is where things don’t look so bright.   Despite steady growth returning to state revenue, the demands placed on state expenditures are growing even faster.   If we simply maintain the current spending commitments under our now greatly reduced state budget, but take into account the fact that health care and pension costs are rising, and that the legislature and voters (aided by courts), have increased the state’s commitments to education, we come up several billion dollars short in the coming biennium, and as much as $4.5 billion short in 2013-15 biennium.   Thus, over the next four years the state is committed to spending about 10 percent more than it will bring in; and this gap gets even worse farther out.

Now we confront the structural problem with the state’s tax system:  Even in a healthy economy, tax revenue won’t keep up with the demands for state expenditures.

Even if you think the appropriate response to this problem is first to reduce what it is we look to the state to fund, at least some of the solution has to come from more tax revenue – that is unless you want to forego spending on kids, the vulnerable, and the elderly.  The underlying problem is that growth in Washington’s tax base – what it is the state taxes to get its revenue — doesn’t keep up with Washington’s economy.  That is why in this state we have the strange combination of rising tax rates – be it with the sales or the B&O tax rate – coupled with a declining share of our income going to Olympia. 

Take the retail sales tax, which accounts for half of the state’s general revenue.  The tax base in this instance is sales within the state that are subject to this tax.  In the not so distant past, the value of about half of everything produced in Washington was taxed.  More recently, economic growth in the state has been most rapid in services and internet sales which by and large are exempt from the sales tax.  Today almost two out of every three dollars of value produced in Washington are of things not subject to the sales tax.  To put it simply, the ability to generate revenue via the sales tax is in decline.  The main way Olympia has responded to this is through increases in tax rates. 

A basic principle of good government finance is to combine a large tax base with low tax rates.    With a declining tax base and rising tax rates, Washington is a good example of how not to finance your government.   And by foreclosing the possibility of taxing income or extending the sales tax to other items , the election results have harmed us by making it more difficult to broaden the state’s tax base .   Now we’ll have a devil of a time figuring out how to fund our schools, nursing homes and colleges and pay for health care costs without continuing to jack up tax rates that are already too high.

So the real crux of the budget problem in our state is that after the election, a lousy set of options for funding state services just got lousier.