Lawmakers need to focus on structural problems with budget

Published in The News Tribune, January 5, 2012

As our legislators return to Olympia, they must feel like the Bill Murray character in the movie Groundhog Day.  Each year they show up at Olympia and find that — once again — revenue falls far short of expenditures.  Let’s hope this year they find a way to awaken from this bad dream.

To start, legislators should begin distinguishing short- from long-term budget problems.  Short-term cyclical problems are caused by a weak economy.  Once the cycle’s downside ends, this problem vanishes.  While we still need to fix cyclical shortfalls, a temporary solution may be all we need.

Longer-term structural problems are more concerning.  Structural deficits mean that even in good times, revenue won’t keep up with expenses and we’re living beyond our means.  It would be immensely helpful to have a budget process that distinguished between these problems so that we get the right mix of temporary versus permanent solutions.

In fact it’s apparent that Washington’s budget suffers almost exclusively from structural shortfalls.  According to state projections, the next two biennia (2013 through 2017) will be marked by $1.5 to $2 billion deficits even though the recession should be long over.  To awaken from the bad dream, then, means refraining from short term (and occasionally deceptive) measures, and instead either permanently downsizing government or upsizing revenue.

What would it look like to “downsize government” so that its size was consistent with revenue?  Not pretty.  And probably not the option most of us would choose.

Constitutional requirements and contractual and legal obligations leave more than two-thirds of the budget off limits.  To get matching federal Medicaid dollars, the state must spend on Medicaid.  State law mandates that we lock up criminals.  Federal law requires the state to enforce environmental regulations.  The state Supreme Court commands that most of our K-12 spending comes from Olympia.  And by contract the state must meet its debt and pension commitments.  A few select areas such as higher education, some human services, and parks would be left to bear the entire brunt of any “downsizing.”

This, of course, leaves us with the central question we face:  What is it we want our state government to provide us with?  Currently, we ask too much while paying too little.  Recently-released U.S. Census Bureau figures show that the share of our personal income paid in state and local taxes – 9.3 percent — is now at its lowest level since 1960 when it was first tracked (at 9.8 percent that year, it was at its second lowest rate ever).  As income in the state has gone up, we’ve been paying an ever-smaller share of it to government.  It’s now a third below its peak of 12.8 percent in 1972.

This downward trend in taxes has two causes.  First, there is a strong but mistaken belief that taxes in our state trend in one direction only, and citizens must therefore be forever vigilant against this tendency. This belief has made it politically nearly impossible to create important new revenue sources.

The second reason for our continual fiscal problems is that our outdated sales tax base doesn’t keep up with the changing economy.  Economic growth is most rapid in services and internet sales which mostly aren’t taxed.  Unlike in the past, the bulk of what Washington produces today isn’t subject to our sales tax.  As one indication, over the last year state income has gone up but sales tax receipts have remained flat.

While it’s politically difficult to raise taxes, that doesn’t mean we don’t support new ways to spend non-existent funds.  Case in point is the passage of HB 2776 two years ago in which legislators committed the state to funding a much-needed broadening of its K-12 role.  But the law included no way to pay for this new role.  Over the coming two biennia, legislators must come up with a total of $3.5 billion to meet these new commitments.

While legislators seem trapped in a bad dream, we citizens too seem to live in our own dream.  Here’s hoping that this New Year serves as a wake-up call to us all.