Raising Taxes Would Prevent Economically Damaging Budget Cuts

Later this week, the Governor is expected to release her supplemental budget to close the $2.6 billion deficit that is a result of the ongoing economic crisis. State lawmakers will have difficult decisions to make in the upcoming months, as they find a way to balance the state budget. We encourage them to take a balanced approach that includes revenue enhancements as well as spending reductions to protect essential public structures such as health care and education.

Raising revenue is a better alternative for our state economy than budget cuts. In a paper for the Center on Budget and Policy Priorities, Nobel Prize winning economist Joseph Stiglitz and Peter Orszag, now director of the Office of Management and Budget, wrote, “In the short run (which is the period of concern during a downturn), the adverse impact of a tax increase on the economy may, if anything, be smaller than the adverse impact of a spending reduction, because some of the tax increase would result in reduced saving rather than reduced consumption.”

Last February, the Budget & Policy Center released a letter signed by over 20 economists and public policy experts in Washington State urging lawmakers to take a balanced approach, including revenue increases, when addressing the state’s budget deficit. “Implementing deep cuts in government spending and declining to raise revenue through tax increases is not an effective strategy to guide Washington State out of this recession,” the letter states.

The letter remains a potent reminder to lawmakers to consider all options for balancing the budget in the challenging months ahead. We certainly hope that they will.

35 States Face New Budget Shortfalls, More Federal Fiscal Relief Needed

A new analysis from the Center on Budget and Policy Priorities (CBPP) finds that 35 states – including Washington State – face new budget shortfalls in the current 2010 fiscal year as a result of the national recession.* Each of these 35 states had already acted to close significant budget shortfalls, but have seen new gaps open up as the economic outlook worsened over the summer and fall.

Even after the economy begins to recover, state fiscal problems are likely to linger for several years as a result of persistent unemployment. According to the report, “High unemployment and economic uncertainty, combined with household’s diminished wealth due to fallen property tax values, will continue to depress consumption, thus sales tax receipts also will remain low. These factors suggest that state budget gaps will continue to be significantly larger than in the last recession, and last longer.”

The graph below shows the total size of state budget gaps closed during the recession of the early 2000s and current recession. In aggregate, states are projected to face sizeable shortfalls at least through 2012.



It is important to note that the measures taken to fill state budget gaps earlier this year – that is, cuts in services and tax increases – would have been much more severe were it not for state fiscal relief provided as part of the federal American Recovery and Reinvestment Act (ARRA), also known as the federal stimulus act.

However, the state fiscal relief provisions of ARRA are scheduled to expire on December 31, 2010. Another recent CBPP analysis calls for extending these provisions into 2011. “By taking action now to extend ARRA assistance to states into 2011, lawmakers can reduce the drag that very large state budget cuts and tax increases would otherwise impose on economic activity and jobs and thereby give the recovery a better chance of gathering strength.”

* The size of Washington State’s deficit has grown significantly since this report went to press. It will be updated in the next edition.

New Census Poverty Data Reveal Deep Disparities throughout Washington

According to new data from the U.S. Census Bureau, nearly 730,000 Washingtonians lived in poverty in 2008. In total, 11.3 percent of the state’s population had incomes at or below the federal poverty line last year. The overall poverty rate in 2008 remained statistically unchanged from the previous year, signaling that the data does not capture the full impact of the recession. Data for 2009, when the economic crisis worsened dramatically, is likely to show a disturbing increase in the number of Washingtonians living in poverty.

Poverty among Minority Communities in Washington

Poverty rates varied significantly across communities in Washington, with certain minority groups and counties experiencing higher rates compared to the general population. For example, last year members of Native American, African American, and Hispanic households were more than twice as likely to be impoverished compared to the population as a whole. The graph below shows that the poverty rate among Native American households stood at 26.1 percent. Similarly, African American and Hispanic communities experienced poverty rates of 22.9 and 23.5 percent, respectively. At the same time, Asian (9.2 percent) and White (9.9 percent) households were significantly less likely to be in poverty compared with the general population.



Poverty by County

Poverty rates in 2008 also varied significantly among Washington’s 19 largest counties – those with populations above 65,000. Compared to the statewide average, sparsely-populated counties tended to see higher poverty rates. The graph below shows that the poverty rate was highest in Franklin County (20.5 percent), followed by the counties of Yakima (18.3 percent), Grant (15.7 percent), Whatcom (14.7 percent), and Spokane (13.7 percent).



Conversely, residents in the counties of Snohomish (7.9 percent), Island (8.0 percent), King (9.1 percent), and Clark (9.6 percent) were significantly less likely to live in poverty compared with the statewide general population.

The poverty rate was not significantly different from the state average in Benton, Chelan, Clallam, Cowlitz, Grays Harbor, Kitsap, Lewis, Pierce, Skagit, and Thurston counties.

2009 Data Likely to Be Much Worse

Today’s 2008 data does not capture the full impact of the current recession. While the unemployment rate in Washington averaged 5.3 percent in 2008, that number jumped to 9.2 percent by August 2009. Overall, 66,000 jobs have been lost in Washington since the start of 2009. Nationwide, the recession has taken a greater toll on communities of color. In the U.S., the unemployment rate among white workers was 8.9 percent in August; but among African American and Hispanic workers, the rates was 15.1 and 13.0 percent, respectively.

In Franklin and Yakima Counties, 28 Percent of the Population Lacked Health Insurance in 2008

According to new data from the U.S. Census Bureau, 13.1 percent of Washington’s population went without health coverage last year. Among the state's 19 largest counties – those with populations over 65,000 – there was significant variation, with more than one of every four Washingtonians in Franklin County and Yakima County lacking health insurance.

Counties with larger populations generally experienced lower uninsured rates compared to the state average. Yet even in King County, one of every 10 residents (10.6 percent of the population) was uninsured in 2008. In addition to King County, Island County (9.5 percent), Thurston County (10.9 percent), and Spokane County (11.8 percent) all experienced uninsured rates significantly lower than the statewide average. In Benton, Clark, Kitsap, Lewis, Pierce, Snohomish, and Whatcom counties the uninsured rate was about the same as the state average.



Of Washington’s most populous counties, Franklin County and Yakima County had the highest uninsured rates in 2008, which stood at 27.7 percent and 27.5 percent, respectively. Residents in the counties of Grays Harbor (16.0 percent), Clallam (16.6 percent), Cowlitz (16.7 percent), Skagit (16.7 percent), Chelan (19.7 percent), and Grant (20.5) were also significantly more likely to lack coverage compared to those in rest of the state.

While today’s data sheds much-needed light on the disparities in health coverage throughout Washington, next year’s data are likely to be far worse. In 2008, the unemployment rate averaged 5.3 percent in Washington. However, the economy deteriorated dramatically in 2009. As of August, the unemployment rate in Washington stood at 9.2 percent, and nearly 66,000 jobs have been lost in the state since January. A BPC analysis of the census health coverage data in 2007-08 shows the employer-based coverage weakened significantly during that period – a trend that will certainly continue throughout 2009.

For information on the uninsured rate among children in Washington State counties, click here to view an analysis from Washington Kids Count and the Children's Alliance.

Editor’s note: The Census Bureau originally planned to release single-year estimates of all indicators included in the 2008 American Community Survey (ACS) today. Due to a coding error, however, ACS poverty estimates will not be released until September 29, 2009. That morning, the Budget & Policy Center along with Washington Kids Count will release an analysis of the latest poverty data from the ACS.

Nearly 1 in 6 Washington Workers Were Underemployed in First Half of 2009

In the first half of 2009, 16.2 percent of Washington’s potential workforce was underemployed each month on average. Two years earlier, before the recession, the underemployment rate was 9.4 percent.

The underemployed includes workers who:

• Are unsuccessfully looking for work (the unemployed),


• Are marginally attached to the labor market, such as workers who have given up looking for work because they have become discouraged,


• Are working part-time for economic reasons, such as an inability to find fulltime work.

Struggling to Make Ends Meet

Today, the Northwest Area Foundation released the findings from a national survey of 4,000 adults called "Struggling to Make Ends Meet." The findings are easily accessed using an interactive tool. Findings from Washington State include:

• 31% of respondents reported that they or a family member lost a job in the last 12 months.
• 35% had their hours (or those of a family member) cut at work in the last 12 months.
• 61% report cutting back on spending as a result of the recession.

Other topics include awareness of available services, ability to pay for basic needs, the scope of and explanations for hardship in local communities, and views about elected officials.

More Bad News for State Revenue

Today’s new revenue forecast from the Economic and Revenue Forecast Council widens the current state fiscal gap by $238 million.

The balance sheet included in the forecast shows the general fund deficit for the current biennium to be $430 million with a balance of $245 million in the rainy day fund. Those numbers do not include an adjustment for the most recent caseload forecast. Including the caseload forecast would increase the deficit by about $250 million.

While the sizable current deficit is a matter of concern, of greater concern are:

• The 2011-13 biennium, which could face a deficit reaching into the billions of dollars when federal recovery funds being used to support education, health care, and public safety are no longer available.
• The potential passage of I-1033, which could cost the state nearly $6 billion by 2015.

Details:

The $238 million in decreased revenue expectations breaks down as follows:

• $109.6 million is due to a weaker forecast for consumer spending.
• $46.1 million is due to a State Supreme Court case which will lower B&O collections.
• $82 million is due to lower-than expected revenue collections since the last forecast.

Washington Families Risk Losing Housing Assistance

Thousands of low income families in Washington could face painful reductions in housing assistance if Congress fails to approve additional funding for a critical federal voucher program. The Housing Choice Voucher Program provides rental support for about two million low income families throughout the United States. The program, however, faces a large budget shortfall for the remainder of 2009. Left unfilled, this shortfall could force hundreds of state and local housing agencies, serving 500,000 families, to curtail or eliminate rental assistance administered through the voucher program. Here in Washington, as many as 11,550 families could see reductions in housing vouchers.

According to a new analysis from the Center on Budget and Policy Priorities (CBPP), the shortfall in the voucher program immediately threatens rental assistance in about 400 state and local housing agencies. Cumulatively, these agencies will need an additional $130 million in funding for vouchers in 2009 to avoid drastic cuts in rental assistance and to restore assistance where cuts have already been made.

As of May 2009, shortfalls among housing agencies in Washington totaled nearly $1.6 million, leaving vouchers for 404 families completely unfunded.

The CBPP report goes on to show that states will have few good options should congress fail to approve additional funds for the voucher program. These options include:

• Denying vouchers to eligible families on waiting lists, even when slots become available;



• raising rents on voucher families;



• reducing rents paid to property owners; and



• terminating vouchers for participating families.

Income Inequality Grew Steadily from 2002-07

The top one percent of wealthiest households in the U.S. saw almost unprecedented income growth between 2002 and 2007, with income rising ten times faster than it did for the bottom 90 percent of households. As a group, the richest one percent of households saw their incomes grow by 62 percent during this period, after adjusting for inflation. By comparison, the bottom 90 percent of Americans (those with annual incomes below $110,000) experienced income growth of only four percent.

According to a new analysis of IRS data by economists Thomas Piketty and Emmanuel Saez (summarized by CBPP), income growth skewed in favor of the wealthy during the 1920’s, but then turned towards the middle class during the post-WWII era. As the graph below shows, in the early 1980’s income growth again began to concentrate in the upper tiers of American households.



Income gains have been even more pronounced among those at the very top of the income scale. The CBPP report shows that incomes in the top one-tenth of one percent of U.S. households grew by about 94 percent ($3.5 million per household) from 2002 to 2007.

The report does not show the impact of the current economic recession. Even though it is expected that income concentration will fall in 2008-09, once the recovery begins economists predict income inequality trends will continue.

New Census Health Insurance Data Likely to Show Declines in Health Coverage throughout Washington State

Tomorrow, the U.S. Census Bureau will release national and state health insurance data for 2007-2008. The data will provide a preliminary glimpse of the impact that the current recession has had on families in Washington and throughout the nation. The data will not however, capture the full impact of the current economic crisis which deepened dramatically in 2009.

The new Census data is expected to show significant increases in the share of the population that is uninsured since the early 2000’s to 2007-2008. The loss of employer-sponsored health insurance is likely to be the dominant driver behind this trend. During the current recession, the economy sunk rapidly in 2009 and many more people lost their jobs and their health insurance. So while tomorrow’s release will signal trouble, next year’s 2008-2009 health coverage data will undoubtedly be far worse.

For example, as the graph below shows here in Washington the unemployment rate jumped from an average of 5.3 percent in 2008 to 9.1 percent by July 2009. Since the start of 2009, over 64,000 jobs have been lost in the state. As a result, next year’s 2008-2009 data will show a large drop in the number of Washingtonians enrolled in employer-sponsored health coverage.

Stay tuned to schmudget tomorrow when the Budget & Policy Center in conjunction with Washington Kids Count will post an analysis of health coverage trends in Washington using the new Census data. Our analysis will highlight changes in the share of the population without health insurance over time and will detail changes in employer-sponsored coverage and public coverage in Washington State.

Editor’s note: Tomorrow’s release will also include updated data on poverty and median income. To obtain state-level estimates of these measures, however, the Census Bureau recommends using data from a different survey, the American Community Survey (ACS). The latest ACS data for 2008 will be released on September 22, 2009. That morning, the Budget & Policy Center and Washington Kids Count will post analysis of the ACS data on poverty, median income, and health coverage in Washington State.

Toxic Twins Part 4: TABOR Did Nothing for Colorado's Economy

Supporters of initiatives like I-1033 argue that rigid public spending limits can be a boon for state economies. In Colorado, however, TABOR had no positive impact on the state’s economy. In fact, after enacting TABOR, employment growth in Colorado slowed relative to other states in the region. Worse, following the last recession employment recovered much more slowly in Colorado compared to neighboring states.

The table below shows that employment in Colorado grew at an annual rate of only 0.2 percent between 2001 and 2006. At the same time, the median annual growth rate among the remaining seven states in the mountain region was 9.3 percent.

For more information on how TABOR adversely impacted core public services in Colorado, see our recent report, Toxic Twins: I-1033 Mirrors Colorado’s Corrosive TABOR, coauthored with the Colorado Fiscal Policy Institute.

Editor's note: This is the final post in series about TABOR's adverse effects on essential public services in Colorado. Previous posts in the series detail the sharp declines in education funding, health care services, and transportation infrastructure that ocurred in Colorado under TABOR.

Toxic Twins Part 3: Colorado’s Transportation Infrastructure Deteriorated Under TABOR

I-1033 will lead to severe deterioration in public structures that are vital to Washington’s future prosperity, much like what happened with Colorado’s TABOR amendment. Our latest report, coauthored with the Colorado Fiscal Policy Institute, details TABOR’s disastrous impact on education, health care, communities, and transportation. This post highlights some of our findings on the serious erosion in Colorado’s transportation infrastructure as a result of budget shortfalls created by TABOR.

Under TABOR, Colorado was unable to make adequate investments in roads, bridges, and other forms of transportation infrastructure. In 2007, the state ranked 48th among all 50 states in spending as a share of personal income on highways. The result:

• About 40 percent of the state’s roads were rated poor in 2006.
  


• Over 100 bridges in Colorado have been found to be structurally deficient.
  


• Congestion on Interstate 70 has been estimated to cost Colorado’s economy about $839 million each year.
  

To learn about TABOR’s adverse effects on other core public services – such as health care and education -- click here to view the entire report.

Editor’s note: This is the third post in a series about the sharp declines in core public services that occurred in Colorado as a result of the TABOR amendment. The next and final post in this series will discuss economic growth in Colorado during the period in which TABOR was active (1992-2005).

Toxic Twins Part 2: TABOR Caused Sharp Declines in Health Care Funding

Our latest report, co-authored with the Colorado Fiscal Policy Institute, details TABOR’s impact on education, communities, health, and transportation infrastructure. This post highlights some of our findings regarding TABOR’s disastrous effects on public health programs in Colorado.

In Colorado, TABOR greatly compromised a critical part of the public safety net – health care services. From 1992 to 2005, TABOR-induced shortfalls forced deep cuts in health care services throughout Colorado. The result:

• Between 1992 and 2004, the share of lower income children with no health insurance doubled from 16 to 32 percent, making Colorado the worst in the nation by this measure.
  


• In 2002, the state could no longer afford basic vaccines and had to suspend the requirement that all students be vaccinated against common diseases such as tetanus, diphtheria, and whooping cough.
  


• In 2003, budget restrictions forced the state to temporarily stop the enrollment of children in the children’s health program and suspend the prenatal program.

TABOR had numerous adverse effects on health care and other public services in Colorado. For more detail, please click here to view the entire report.

Editor’s note: This post is the second in a series about the sharp declines in Colorado’s core public services that occurred as a result of the TABOR amendment. There will be two future posts: The next post will cover TABOR’s effects on transportation infrastructure; the final post will discuss economic growth in Colorado during the period in which TABOR was active.

Toxic Twins: I-1033 Mirrors Colorado's Corrosive TABOR

To understand how Tim Eyman’s I-1033 would undermine public investments and our economic recovery in Washington, look no further than Colorado. Our new report, co-authored with the Colorado Fiscal Policy Institute finds that Colorado's TABOR amendment greatly undermined that state's capacity to maintain core public services such as education and health care. Initiative 1033, which will appear on the ballot in Washington State this November, possesses the same fundamental characteristics as TABOR and would have a similar impact on Washington.

Editor's note: This post is the first in a series about TABOR's impact on services and public priorities in Colorado. Future posts in this series will detail TABOR's impact on other crucial services -- including health care and transportation infrastructure. The final post in this series will discuss economic growth in Colorado while TABOR was in effect.

To view the full report click here.

TABOR's Impact on Education and Opportunity

Under TABOR, funding on K-12 and higher education declined substantially, leading to harmful budget cuts throughout the education system. As a result:

• The state fell from 35th to 49th in the nation in spending on K-12 education as a share of personal income.


• Average teacher’s salaries fell from 30th to 50th in the nation compared to pay in other occupations.


• Higher education spending per resident student declined by 31 percent after adjusting for inflation, from $5,188 to $3,564.

The shortfalls created by TABOR adversely impacted Colorado’s education system in numerous other ways. For more information on how TABOR led to steep declines in education funding throughout Colorado, view the entire report by clicking here.

Unemployment Rate Understates Problem

The statistic most often used to illustrate weakness in Washington State’s labor market is the unemployment rate, or the share of the labor force that is unsuccessfully looking for work. At the national level, the Bureau of Labor Statistics publishes a more comprehensive measure often called the “underemployment rate.” That measure includes people who have stopped looking for work because they have become discouraged. It also includes people who are working part-time because they can’t find fulltime work. During a recession, the gap between the two rates widens because of the increased difficulty of finding employment.

The Bureau of Labor Statistics doesn’t publish state-level underemployment rates, but a recent post by Joe Turner got me wondering what was happening with underemployment in Washington State. So I dug into the microdata and the results are shown below. (April is the most recent month available.)

The Final Budget Cuts, Part Two: Education and Opportunity

Broadly available education and opportunity is fundamental to the future of our state. Education opens doors to better job opportunities, higher wages, and greater job security. Success in today’s competitive, knowledge-based economy will require more than a basic education. Our children need schools that provide sophisticated, high-quality learning environments so they can graduate with the skills and knowledge to succeed in the global marketplace.

This year's budget process resulted in significant budget cuts in education, as shown in the table below (click on it to see a larger version).


In K-12 education, the largest cuts were to two voter-approved initiatives (I-728 and I-732). I-728 called for funding to school districts for specific quality improvements such as class size reduction, extended learning, early learning, or professional development. I-732 called for a cost of living adjustment for education professionals. This cut will diminish the state's ability to attract and retain high quality teachers, a proven factor in improving student performance in school. A number of other education reform efforts were also suspended, eliminated, or reduced.

Higher education will also suffer under the new budget. Despite federal stimulus efforts, community and technical colleges will have $226 million less in state support during a time when the need for workforce training is growing dramatically. In addition, the university system will receive $384 million less in state support. Tuition will rise and services will be cut as a result.

These cuts will harm the long-term economic competitiveness of our state as well as the availability of quality education for all of Washington's students.

* Note: Federal stimulus funds not directly affecting the near-general fund balance are not included.

When Will the Recession Be Over?

According to the Economic and Revenue Forecast Council, the end of the recession is in sight--as early as later this year. That's good news.

However, the end of the recession only means the economy as a whole will be growing again. It will take some time before the labor market rebounds. According to the Forecast Council, the unemployment rate in Washington will rise through the third quarter of 2010 and then only drop slightly.


The green line below shows one measure of the size of the state economy--personal income (an estimate of the total income received by all Washingtonians from all sources), adjusted for inflation. The purple line shows the projected unemployment rate.

Closing the Deficit: An Unbalanced Approach

This afternoon, the Governor will take action on an operating budget that must close an $8 billion deficit, likely the largest in state history. Rather than take an approach that balances raising revenue and reducing spending, the budget passed by the Legislature relies heavily on deep budget cuts in education, health care, economic security, public safety, and the environment.

The graph below shows how the Legislature’s budget closes the three-year deficit. (The numbers may differ slightly once the Governor exercises her veto power.)

• Budget cuts: The budget makes a total of $6.7 billion in near-general fund cuts. We'll be providing more detail on these budgets cuts later in the week. Federal stimulus funds offset $3 billion of these cuts, however this number is somewhat misleading because other spending cuts reduce the federal funds the state is entitled to receive.


• Revenue: Actions on revenue are expected to raise a net $242 million. These include restructuring the resale certificate program, opening nine liquor stores on Sunday, and opening liquor stores in malls during the holiday season.


• Rainy Day Fund: $445 million is transferred from the Rainy Day Fund, leaving a balance in that account of $250 million.


• Capital budget resources: The budget uses $777 million of funds that are typically appropriated in the capital budget.


• Other transfers and changes: An additional $389 million in funds is accessed by transferring money from other accounts and making other marginal changes.


• Ending balance: These actions leave an estimated $573 million in an unrestricted balance, although recent revenue collections suggest the ending balance could actually be lower.

Series on the State Budget Crisis: Part Three, States Raise Taxes

States are struggling to balance their budgets during the current economic recession. As we discussed in yesterday's post, many have opted to cut spending as a result. But given the sheer size of state budget shortfalls, cuts alone will not be enough to solve the problem without long term harm to essential public services.

According to a new report from the Center on Budget and Policy Priorities, instead of a cuts-only approach, states are increasingly employing a combination of budget solutions that involves drawing down reserve funds, maximizing the use of federal dollars, and raising taxes.

As the map below shows, so far in 2009 sixteen states have raised new revenue through tax measures. Another 17 are giving serious consideration to doing so. These initiatives are in addition to revenue actions taken in states in late 2007 and 2008 as the recession’s effects began to be felt.


In addition, the report finds that states that raised taxes during the 2001 recession were just as fast to rebound from the recession as states that did not, even though they were typically climbing out of a deeper hole.

Series on the State Budget Crisis: Part Two, Cuts to Vital Programs

As we mentioned in yesterday's post, almost every state in the nation is facing budget deficits because of the weakened economy. The federal American Recovery and Reinvestment Act includes roughly $140 billion in fiscal relief for state governments. But the recovery act funding will only be enough to fill about 40 percent of the $350 billion to $370 billion shortfall that states will face in the next two-and-a-half years.

According to a new report from the Center on Budget and Policy Priorities, at least 36 states have addressed their shortfalls by cutting spending. As the report notes, cuts in state budgets worsen the recession by reducing overall economic activity. Reductions in state spending translate into fewer state jobs, canceled contracts with vendors, lower payments to businesses and nonprofits that provide services, and cuts in benefit payments to individuals.

Importantly, cuts in state spending also particularly hurt the most vulnerable residents in the state. The report outlines five areas in which states have made cuts. Washington State has made cuts in all of these areas.

• Public health programs: At least 19 states have implemented cuts that will affect low-income children’s or families’ eligibility for health insurance or reduce their access to health care services.


• Programs for the elderly and disabled: At least 21 states plus the District of Columbia are cutting medical, rehabilitative, home care, or other services needed by low-income people who are elderly or have disabilities, or significantly increasing the cost of these services.


• K-12 education: At least 22 states are cutting K-12 and early education.


• Colleges and universities: At least 30 states have implemented cuts to public colleges and universities, resulting in cuts in faculty and staff and tuition increases of 4 percent to 15 percent.


• State workforces: At least 39 states and the District of Columbia have made cuts affecting their state workforces. At least 27 states and the District of Columbia have instituted hiring freezes, 10 have announced lay-offs, 15 have reduced state worker wages, and several have delayed scheduled pay increases (including cost of living adjustments).

Click on the chart to see a state-by-state view of cuts in these budget areas.


Tomorrow we will post on states that have raised taxes to help close budget deficits during the current recession.