State revenues continue their plunge. Another official forecast is due today. The “looming $3.2 billion deficit” of campaign commercials turns out to have been a best-case scenario. Now lawmakers publicly fret about a shortfall approaching $4.6 billion. That’s for the two-year budget cycle beginning next July, which budget lawmakers begin writing in January.
At times like these, enterprising legislators turn to the revenue department’s inventory of delicately-labeled “revenue alternatives.” There are a hundred ways to cook a taxpayer and they are all on the menu. Like Thanksgiving turkeys, it really doesn’t matter much whether we’re fried, roasted or fricasseed. There’s never a happy ending for the bird.
Projected state spending for the coming biennium has been pegged at about $34.5 billion, an increase of about 16 percent above current spending. If revenues come in $4 billion short, the corresponding cut in spending amounts to 12 percent. That’s tight, but then, a 16 percent bump makes no sense.
State officials have developed an array of tools for evaluating spending and setting priorities. Gov. Chris Gregoire continues to use the Priorities of Government program former Gov. Gary Locke pioneered in 2001 to balance a recession-hammered budget without tax increases. Three years ago voters authorized performance audits of all government programs. And Gregoire’s GMAP program (Government Management, Accountability and Performance) focuses on performance and program effectiveness. Lawmakers should use the tools, control spending, and avoid punishing tax hikes.
The alternative is decidedly unpalatable. Picking through the revenue menu, let’s consider the tax hikes required to generate $4 billion over two years. There are only three major levers lawmakers can pull: sales, property or business. Sin taxes, nickel-and-dime tax tweaks, and shell games don’t produce the big bucks.
Even a 1-cent increase in the state sales tax, from 6.5 percent to a highest-in-the-nation 7.5 percent, would raise only about $2.2 billion, roughly half the gap. Voters in the Sound Transit district just approved a half-cent increase, bringing the combined state-local sales tax in much of the Puget Sound region close to a dime on a buck. I doubt there’s any appetite in the region for an 11 percent sales tax. Retailers already reeling from depressed sales don’t need the Legislature to give customers another reason to avoid their shops.
Then there’s the ever-unpopular property tax. Many homeowners find themselves in homes of declining value, some worth less than their mortgages and others well below their assessed taxable value. Forget about it.
That leaves business taxes. Putting a 25 percent surtax on existing Business and Occupation taxes would raise about $1.6 billion. Unlike their competitors in Oregon, Idaho and most of the U.S., Washington businesses pay taxes based on gross receipts, not profits. Hiking their taxes by one-quarter would be unconscionably punitive. Entrepreneurs currently struggle to keep the doors open, pay employees and put food on the table.
What else is on the menu?
Some lawmakers will want to extend the sales tax to business and professional services. No one has figured out how to do that, yet. The three big services clusters — legal, financial and medical services — are all exempted for good reason. Legal and financial services easily move out of state; taxing medical services raises the cost of health care. What’s left doesn’t raise enough money to justify the fight. (Wisely, the menu doesn’t even consider extending the tax to food and prescription drugs.)
Others will press to repeal existing tax exemptions. A repealed exemption is a tax hike. With manufacturers and high tech firms already eyeing more tax-friendly states, repealing exemptions would cost Washington critical jobs and revenues. The department’s estimates fail to account for the effect tax hikes have on behavior. When taxes go up, consumption and investment go down. The state’s incentives for research and development and for manufacturing investment have produced positive net income for the state.
After boosting spending by more than a third over the last four years, lawmakers must now hold the line. They promise us a vote on new taxes. Here’s a better idea: Fold the menu, push away from the table, and live within your means.
Richard S. Davis writes on public policy, economics and politics. His e-mail address is richardsdavis@gmail.com.
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