Commentary: Keep Revenue Options On the Table

We’ve offered one approach to state budget decision-making in our Progress Index report - identifying a long-term vision for the state and then using high-quality research to determine how to get there. But of course there are other approaches.

Richard Davis’ thoughtful column from Wednesday’s News-Tribune and The Herald presents two alternatives - "Priorities of Government" and the "Washington Monument Strategy" - and argues for the first.

He extols the "Priorities of Government" approach. This is a process developed by the Locke Administration in order to help them solve the last big budget crisis. A key aspect of this process is that it starts the budget-making process with the limitation that nothing can be changed about revenue. Davis argues for this approach and the Governor agrees. Her budget release states:

"In constructing the budget for 2009–11, Governor Gregoire began with one basic premise: Now is not the time to raise taxes on our residents and businesses."

As a "basic premise," this places a false limitation on our priority-setting process. A more productive budgeting process during these tough times would allow revenue increases and tax exemptions to be considered alongside spending cuts so that we can decide on our priorities from among a full range of options.

Unfortunately, the Legislature is bound from considering the full range of options because of a series of limitations put on them by ballot initiatives. In order for the Legislature to raise revenue, they are, practically speaking, required to put it on the ballot.

I agree with Davis; budgeting on the ballot is not ideal. I share his dislike of what he calls the "Washington Monument Strategy," (referring to the National Park Service using the threat of closing the monument to stave off budget cuts). It’s the budget equivalent of "If you don’t buy this magazine, we’ll kill this dog." It’s not a strategy that moves us toward a long-term vision.

But while Davis makes a well-reasoned argument against the Washington Monument Strategy in terms of spending, he makes a blanket statement about business taxes: "Any increase in the cost of doing business delays the recovery and places jobs and investment at risk." Hmmm. "If you raise this tax, we’ll shoot this recovery?"

The fact is that a budget that cuts billions of dollars from public investment does pose threats to the progress we have been making as a state on education, health, community vitality, and economic security. And while tax increases are not ideal, economic theory and experience shows that they are less harmful than deep cuts in state spending.

It’s time for a reasoned public discussion about the state budget that allows all options to be on the table.

Climate Change: Governor’s new proposal protects consumers with lower incomes

Clean air and energy independence are central to advancing the well-being of families and communities, as well as improving the economic security and social opportunity of all Washingtonians.

Today Governor Gregoire announced climate change legislation (HB 1819 and SB 5735) that would implement a "cap-and-invest" system to reduce global warming pollution. The proposal would also invest in the creation of green jobs and worker retraining for those who have been affected by the economic downturn.

An innovation of the proposal is that it prioritizes the use of cap-and-trade auction revenue, with the top priority being to protect consumers with lower and moderate incomes from increased energy costs. Revenue would be generated when pollution permits are auctioned off to polluting companies, who will pass costs on to consumers. Using some of the revenue to offset these higher costs for people with lower incomes assures that the impacts of climate change are not regressive.

We have been working in close collaboration with Climate Solutions, Washington Environmental Council, and Sightline Institute on shaping the state’s climate change policies. There is still work to be done. We will continue our work to shape this discussion as it progresses at the state and national levels.

You can learn more about this on our website and read a joint letter to Governor Gregoire signed by the Budget & Policy Center along with environmental groups, the faith community, low income advocates, and organizations representing communities of color.

House Proposal Makes Deep Cuts; Comparison With Governor's Proposal Difficult

The House Ways and Means Committee will hear the House Democrats' supplemental budget proposal (PSHB 1694) this afternoon.

Three important things to note:

• The House proposal does not assume any maintenance level changes, making comparisons with the Governor's proposal potentially misleading.

• The House proposal reduces the current budget by $172 million more than the Governor’s supplemental budget.

• Both budgets assume the same level of federal stimulus money (assumptions that may be too low given recent developments in D.C.); the House proposal assumes less total federal contribution.

The table below summarizes the key big-picture components of the House Democrats' proposal and the Governor’s proposal. Details follow.


The House proposal does not assume any maintenance level changes

Caution should be exercised when comparing the House proposal with the Governor’s supplemental proposal. Here’s why: the Governor’s budget follows the standard maintenance level approach to supplemental budgets while the House proposal does not.

The maintenance budget is intended to account for changes in the cost of doing what we’ve committed to doing in the current budget. The most significant maintenance budget changes are public school enrollment, enrollment in medical assistance programs, and corrections caseloads.

For example, the state now expects over 1,700 more students in the current school year then was expected when the current budget was passed. Because the House proposal does not account for the increased enrollment, it already starts with a reduction in services. The same money has to be spread between more students. So, for example, while neither budget explicitly proposes cuts in the general apportionment (the primary pot of state money for local school districts), the House proposal would actually spend $21 million less than the Governor’s proposal. In total, the House proposal would spend $44 million less on K-12 education than the Governor’s budget.

In medical assistance, the House Democrats propose $160.1 million in cuts, compared to $164.7 in the Governor’s budget. But that difference is misleading. Because of the lack of a maintenance level in the House proposal, it would spend $70 million less than the Governor’s proposal.

The House Democrats propose deeper cuts in total than the Governor's proposal

While there are important differences within certain programs, the 2007-09 state budget would be $172 million lower under the House proposal than under the Governor's budget. The bulk of the difference is in the three areas where the Governor responds to caseload increases and makes significant maintenance changes: medical assistance, public schools, and corrections. (see graph below).


Both budgets assume federal stimulus; the House proposal assumes less total federal contribution

Both budgets assume that $205 million in state Medicaid spending will be replaced by federal funds made available in a federal stimulus package. Prospects for significant federal funding are good and funds may be much more than initially anticipated. We'll be posting more on that soon. See Joe Turner's post in the meantime.

Both budgets also assume that $133 million in federal contingency funding for TANF will be available to allow for an equal reduction in state spending.

While both budgets assume the same new Medicaid and TANF funding, the House proposal assumes $92 million less in total federal funding. This seems to be largely because lower health care spending in that proposal would result in lower federal contribution.

Data comes from the Washington Fiscal Information website. The title of this post has changed since first published.

Green Jobs and the Economy

Last year, the State Legislature passed, but did not fund, the Climate Action and Green Jobs law.

Investing in green jobs is an important part of a strategy to strengthen our economy. Coming out of the recession, we will need a trained and qualified workforce earning living wages and participating fully in the economy. Training those workers for growing targeted industries such as renewable energy is smart for the economy and good for the environment.

The green jobs initiative would include the creation of pilot green industry skills panels to ensure that trained workers will be able to meet the needs of local industry. It also calls for an increase in the opportunity grants program for green industry training to provide tuition assistance and support services for lower income students as well as funding for curriculum development in this sector.

Many of these initiatives would not be new programs. Community colleges across the state already have existing wind, solar, and biofuel programs that could be scaled up. Federal money is expected to help states embrace the green energy movement. State investments in this area could be used to leverage money from the federal stimulus package.

The need for investments in community colleges and training is especially great during a recession. The graph below shows what happened to enrollment in workforce training programs during the last recession - it rose sharply along with the state unemployment rate.


Funding the green jobs bill would not be enough to offset the deep cuts in community colleges in the Governor's 2009-11 budget proposal. These cuts would place limits on enrollment, raise tuition, reduce classes and services and diminish the ability of lower income workers to prepare for and find jobs in the new economy.

Five Facts About the Economy and Deficit Fact 5: The Deficit Is Already Here

Most of the focus around the budget deficit has been on the next biennium (the two-year budget cycle that will begin on July 1). It’s easy to overlook the fact that we have a deficit right now, estimated to be about half a billion dollars.

It's time to stop overlooking the current deficit. Despite the fact that the legislature has not yet passed a supplemental budget to deal with the current deficit, the Governor has already been ordering cuts in spending. And legislative leaders are weighing in. Yesterday, Senate Democrats proposed $105 million in cuts for the current biennium and House Democrats have signaled that they are working on $300 million in cuts.

When the Governor released her budget proposal in December, the documents outlining the supplemental budget were light on details, with most cuts being grouped into very large categories. For example, in the budget for the Department of Social and Health Services, there was a $55 million cut labeled only "Governor-Directed November Reduction."

Additional information is becoming available. Not surprisingly, the details are important. Hiding in the "November Reductions" are numerous cuts like the elimination of funding for Adult Day Health and an increase in child care co-pays for lower income working parents.

A good place to find the details on the Governor's supplemental proposal is on my new favorite website: Washington Fiscal Information. It's not for the faint of heart (and doesn't seem to work well in Firefox), but you can create spreadsheets with detailed budget comparisons by accounts, sources, and agencies. We'll keep putting up more information on the supplemental budget as it develops.

Well, that's the end of our first "special series." Let us know what you think and what you'd like to see next.

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As an aside, Adam Wilson's blog has a video that you won't see in other coverage of the Senate Democrats' press conference.

Five Facts About the Economy and Deficit Fact 4: The Economy Needs a Big Push

As everyone knows by now, our state economy is in a recession. People are feeling the pinch at home and so are retailers and manufacturers. The question we all want answered is, how do we get the economy moving again?

It helps to understand what exactly is meant by the term “recession.” The economist Jared Bernstein, who is my former boss and is now Vice President Biden’s Chief Economist, sums it up well:

Economies depend on robust demand. When folks stop buying, when investors leave the room, when governments stop building and improving public goods, growth grinds to a halt. And when that happens, the job machine stalls, unemployment rises, those with jobs work fewer hours, wages rise more slowly, and incomes decline, especially for the lowest earners and many minorities.

Lately there has been much talk of a federal stimulus plan to quickly get more money flowing in the economy. There are lots of ways to do that, but some of them are better than others. Mark Zandi from economy.com suggests the best route is to target dollars at lower and middle income households who need the cash and will quickly spend it.

In fact, he estimates the biggest “fiscal economic bank for the buck” (his phrase) comes from increasing unemployment benefits and food stamps. Spending on infrastructure would come next, followed closely by aid to state governments. By comparison, tax cuts seem like a waste of money in terms of stimulus.

When it comes to state government, economic recovery can be more difficult because most states need to balance their budgets. Basic economics says that both tax increases and spending cuts are harmful to the economy during a recession. Using our nascent Rainy Day Fund helps a little. Washington also expects federal aid for health care, economic security, and education, but there’s still a large gap.

So what do we do? Do we choose tax increases or spending cuts?

The Governor’s budget proposal comes down on one side of this question. During the election campaign last fall, she promised not to raise taxes and her budget plan for 2009-11 calls for deep spending cuts to the tune of $3.6 billion.

This is not a position backed up by economic research. Nobel Prize winner Joseph Stiglitz who is the new head of the federal Office of Management and Budget says, “Tax increases on higher-income families are the least damaging mechanism for closing state fiscal deficits in the short run.”

The Governor has also made some smart decisions to help get the economy moving. She has proposed using money from the Unemployment Insurance Trust Fund to temporarily increase benefits for unemployed workers. That plan does not require tax increases and puts money quickly into the economy. It also helps struggling workers. The Governor and legislative leaders have also proposed moving quickly on ready-to-go capital infrastructure improvements.

Five Facts About the Economy and Deficit Fact 3: People Are Losing Their Jobs

Washington State is facing a sustained period of high unemployment. The unemployment rate is projected to rise to 8% or higher (see graph below). That would mean that one of every twelve Washingtonian workers would not be employed despite their efforts to find work.



Additionally, the Economic and Revenue Forecast Council projects that the number of jobs in the state began to fall in the second quarter of 2008 and will continue to fall until the second quarter of 2009—five straight quarters of job loss. Employment will start to grow in the third quarter of 2009, but will not reach the previous level until the end of 2010 (see graph below). In the meantime, the size of the labor force will have grown and many more jobs will be needed to lower the unemployment rate.


Lasting spells of unemployment can be devastating. Families and individuals rely on employment to provide basic necessities including food and housing. When people lose their jobs, they often lose their access to affordable health insurance as well. The negative impact isn’t limited to the unemployed; it also drags down wages and economic activity more broadly.

Shoring up programs that provide economic security should be a top priority of the state budget in these tough times. As we’ve discussed, the Governor’s budget would do the opposite; it would harm the ability of the state to provide economic security.

A potential bright spot is the Governor’s proposal to provide a temporary increase in benefits for unemployed workers. More on that tomorrow in "Fact 4: The Economy Needs a Big Push."

Underlying data come from the Economic and Revenue Forecast Council.

Five Facts About the Economy and Deficit Fact 2: People Aren't Buying Real Estate

The boom and bust of the real estate market in recent years has had a significant impact on the Washington State budget. The extreme volatility of the real estate market in recent years has given a relatively small tax—the real estate excise tax (REET)—a disproportionate role in the state fiscal situation.

When the current budget was passed, a precipitous drop in revenue from the REET was expected and built into budget projections. The real estate market further deteriorated, however, and it became clear that the pessimistic projection had been overly optimistic.

The graph below shows the REET as a share of general fund revenue from 2003 to 2007 and the current projections for 2008 through 2011. From 2003 to 2007, revenue from the REET grew quickly alongside the booming real estate market, moving from 4.4% of general fund revenue to 7.4%. The real estate bust has had the opposite effect. The REET is expected to raise $560 million less in 2009 that it did in 2007.



As I pointed out yesterday, the total amount of general fund revenue in the 2007-09 and 2009-11 biennia has fallen by $2.7 billion since the current budget was passed. Declining retail sales tax revenue explains 68% of that change. Declining REET expectations are the second largest factor, explaining 19%.

The direct effect of the real estate slump on state revenue isn’t limited to the REET, however. While autos are the most significant factor in declining retail sales, sales in real estate-related industries such as home furnishings, building materials, and specialty contractors have also fallen dramatically.

There has also been a direct impact on employment. The Economic and Revenue Forecast Council (ERFC) projects that construction employment will decline by 12% between the fourth quarter of 2007 and the 1st quarter of 2010.

We’ll talk more about employment tomorrow in Fact 3: People Are Losing Their Jobs.


Underlying data come from the Economic and Revenue Forecast Council and the Department of Revenue.

Five Facts About the Economy and the Deficit Fact 1: People Aren't Buying Stuff

The Washington State budget relies heavily on the retail sales tax. When people buy less stuff, the state collects less revenue. Much of our current deficit problem can be attributed to the precipitous drop in retail sales tax revenue over the last year.

The graph below shows taxable retail sales for each quarter from the first quarter of 2007 through the second quarter of 2008. The percentages are the change in sales from the same quarter in the previous year. At the beginning of 2007, sales were growing by 8% year-over-year. During the last half of 2007, they were growing by less than 6%. By the second quarter of 2008, sales were falling by 2%.


The Department of Revenue will be releasing data for the third quarter of 2008 in a few weeks, but it’s a safe bet that sales have continued to fall. The Economic and Revenue Forecast Council (ERFC) expects that taxable retail sales will be lower in fiscal year 2009 than the prior year. That’s only happened twice in recent history: in 1984 and 2002. The current decrease is expected to be deeper than the two previous times.

The recession has hurt some industries more than others. The graph below shows taxable retail sales at auto dealers. Sales of automobiles, which make up about 8-9% of total sales, have plummeted.


Remember a year ago, when we were worried about a $2.4 billion deficit for the 2009-11 budget? It’s more than doubled since then to become the largest deficit since 1981-83.

Most of the difference between the deficit expected last spring and the current projection is due to reduced revenue expectations. The total amount of general fund revenue expected in the two biennia has fallen by $2.7 billion since the current budget was passed. Sixty-eight percent of the difference is from falling retail sales tax revenue.

Another important factor is the real estate excise tax. More on that tomorrow in Fact 2: People Aren’t Buying Real Estate.

Climate Change Fairness in the House Ecology Committe

Our executive director Remy Trupin made a presentation today to the House Ecology and Parks Committee work session on ensuring that climate change policy protects lower income consumers.

During the work session, Representative Upthegrove talked about a letter that was sent to the Governor last summer calling for equitable action on climate change. It was signed by a broad coalition of environmental, faith, and social justice organizations.

Alan Durning from Sightline also presented alongside Remy. Alan has written a useful primer on cap and trade policy. Sightline is one of the many organizations we've been working closely with to develop smart policy solutions to the problem of climate change.

Special Series: Five Facts About the Deficit and the Economy

The economy is bad. The deficit is bad.

But if you want more detail, next week we'll be posting a five-part special series called "Five Facts About the Economy and the Deficit."

We'll start on Monday with: "People Aren't Buying Stuff."

Governor's Budget Undermines Progress

We released a detailed analysis (pdf) of the Governor's 2009-11 budget proposal today. It approaches the budget from the standpoint of how it measures up against four widely shared values: Education and Opportunity, Thriving Communities, Healthy People and Environment, and Economic Security.

The graph above is from the report and shows the percentage cuts in each of these budget areas. Health care and economic security would take significant hits, including:

• Cutting tens of thousands of people from state-funded health insurance programs and lowering benefits for many others.
  

• Eliminating cash and medical assistance to adults who cannot work due to disability.

• Terminating benefits for some families receiving temporary assistance.

Not only does this reverse the progress we have made in these areas recently, but it couldn't come at a worse time given the economy.

But don't think education is exempt; outside of basic education, the K-12 budget would be cut by 28 percent. These are programs that are designed to update our schools for the new economy, to attract and retain the best teachers, and to close the achievement gap for lower income students and students of color.

In short, it's a budget that takes a step in the wrong direction.

For more information on the four values listed above, see the Progress Index.

Homelessness Likely to Rise under Governor's Budget

A decade ago, I was the primary author of the annual survey on hunger and homelessness published by the US Conference of Mayors. During the intervening years, there have been significant new efforts to reduce homelessness in America. Cities, counties, and states have adopted 10-year plans to significantly decrease or eliminate homelessness. There was wide agreement that we all need public supports and services that provide avenues to economic security.

Washington State has a statutory goal of reducing homelessness by 50% by 2015. As part of this 10-year plan the state has made significant investments towards that goal including doubling the size of the Housing Trust Fund and towards helping offenders that are being released from jails and prisons transition into the community without ending up homeless.

This plan (and the complementary plans of cities and counties across the state) are apparently not a priority now. That's the message one would infer from the budget that the Governor submitted. Half-way through our ten-year plans have we decided that the goal of ending homelessness is no longer of value?

After much progress, the Governor's budget undermines this goal by proposing cuts in mental health coverage for adults who don't qualify for Medicaid, reducing transitional housing funding for offenders reentering community settings, reducing the investment in the housing trust fund by 50%, and eliminating cash assistance and medical coupons to disabled adults who can't work.

Homelessness is already on the rise in cities across the nation. According to a report by the Center on Budget and Policy Priorities, a fall 2008 survey of 22 cities found 16 showed an increase in homeless families with children. In another national survey, one in five responding school districts reported having more homeless children in the fall of 2008 than over the course of the entire 2007-2008 school year.

Is this the future we want for our cities and hometowns here in Washington? Now more than ever, the state should invest in reducing homelessness through public supports and services that provide economic security and pathways out of poverty.

Legislative Session Starts, Lawmakers Look to D.C. for Help

The legislative session started today. As we’ve discussed, this session carries with it the challenge of overcoming the largest deficit in decades.

But as Brad Shannon pointed out yesterday in The Olympian, lawmakers also face another enormous challenge: how to "leverage spending to increase jobs, avoid layoffs and spur economic growth."

One strategy of the economy-boosting agenda is to coordinate state plans with programs for economic stimulus that will come from the federal government under President-elect Barack Obama. Shannon's article contains detail on the plans of legislative leaders.

The word from D.C. is that aid to the states is likely to come in the form of block grants and possibly through expanding existing programs that funnel money to transportation or wastewater projects, Shannon says. Gregoire’s list to Congress included $132.9 million for transportation projects and $352.7 million in water and sewer projects.

Federal aid may still be a few months away.

The State Budget Over Time

The Governor's budget (released last month) proposes deep cuts to the state budget that would limit our ability to pursue public investments in health, economic security, and education.

The stark proposal is in response to a large budget deficit. In part, this deficit is the product of the economic crisis. But, as the attached graph shows, the economy is only part of the story. The ability of the state tax structure to pay for normal growth in government spending has been deteriorating for over a decade.

This graph follows the standard of showing budget amounts as a share of total personal income. This provides insight on the resources we have to fund public investments and also recognizes that the cost of government grows along with economic and demographic trends.

The purple line shows that revenue has been eroding since long before the recent economic downturn. It’s a combination of significant tax cuts, spending limitations, and a tax system that doesn’t grow along with the economy even during good times. So while the current fiscal crisis has obviously been exacerbated by the economic crisis, it’s a longer-term problem.

The green line shows spending trends. Up to now, the state has been able to use reserves and stopgaps to hold spending a little steadier than our revenue stream, but we’re out of reserves now and are facing the largest deficit since the 1980s.

The budget cuts proposed by the Governor (shown here by the dashed green line) would be the largest, relative to the economy, in over a decade.

So what does that mean for Washington? Can a budget of this size truly reflect our values and move our state in the right direction?

Tell your friends!

Tim Eyman Initiative on Property Taxes

As the state economy faces historically large deficits and lawmakers scramble to figure out how to balance the budget, Tim Eyman is proposing a new voter initiative designed to limit to the rate of inflation the amount of revenue state and local governments can take in. Any additional funds coming into the government would go directly to reducing property taxes.

To read the full text of the Lower Property Tax Initiative, go here.

Brad Shannon, political editor at The Olympian, points out on his Politics Blog, that the timing of the initiative is probably not a coincidence. "I'm guessing the measure is timed to lock in the soon-to-be reduced size of state and local governments, which are shedding payrolls and costs due to the ongoing recession," Shannon writes. "In Thurston County, losses of sales tax and other revenues are leading to large layoffs of staff, for instance, and Gov. Chris Gregoire has proposed some $3 billion in reduced program outlays. In 2010 and beyond, revenues are likely to spring back, allowing cut programs to be restored, unless lawmakers cut taxes or Eyman's measure succeeds."

For more information see our report on sound property tax policy for the state.

NY Times Krugman on State Spending Cuts

For many here in Washington State, the grim reality of the national economic crisis hit home on December 18th, when Governor Gregoire released her 2009-11 budget proposal. The budget contains $3.4 billion in spending cuts that will dramatically reduce funding in the areas of health, education, and social services to try to deal with a projected $5.5 billion deficit.

Many states are facing similar budget problems. According to the Center on Budget and Policy Priorities, a national think tank in Washington, DC, 44 states are experiencing budget deficits that could amount to more than $350 billion in 2010 and 2011. And at least 30 states are imposing budget spending cuts that are likely to harm their most vulnerable residents.

This op-ed by Paul Krugman in the NY Times argues against drastic spending cuts by state governments. He cites cuts in programs such as South Carolina’s juvenile justice program, which will force young offenders out of group homes and into prison and the decision by a committee that manages California state spending to halt all construction outlays for six months.

Now, state governors aren’t stupid (not all of them, anyway). They’re cutting back because they have to — because they’re caught in a fiscal trap. But let’s step back for a moment and contemplate just how crazy it is, from a national point of view, to be cutting public services and public investment right now.

Krugman, who is a professor of Economics and International Affairs at Princeton University, notes that the nation is no less able to pay for these and other vital programs than it was before the recession. "Our capacity hasn’t been diminished; our workers haven’t lost their skills; our technological know-how is intact," he writes. "Why can’t we keep doing good things?"

Part of the reason is that revenue is reduced because private spending is down. And almost all states, including Washington, are obligated to balance their budgets. But instead of draconian cuts in spending, perhaps now is the time to consider new ways to increase revenue.

Krugman points out that public investment makes sense during tough economic times:

In fact, the true cost of government programs, especially public investment, is much lower now than in more prosperous times. When the economy is booming, public investment competes with the private sector for scarce resources — for skilled construction workers, for capital. But right now many of the workers employed on infrastructure projects would otherwise be unemployed, and the money borrowed to pay for these projects would otherwise sit idle.

And shredding the social safety net at a moment when many more Americans need help isn’t just cruel, he says. It adds to the sense of insecurity that is one important factor driving the economy down. Aid from the federal government may also help states to afford vital programs and new projects. Certainly, that would help.

One thing is clear, Washington legislators will have their work cut out for them when they return to Olympia on January 12th. Let's hope all ideas and solutions to our budget woes will be considered.