By now almost everyone agrees this is the most punishing budget environment since the Great Depression. A regressive tax system coupled with a deep and persistent recession has forced legislators, on both side of the aisle, to carefully reexamine the values that define our State. Limitations in the form of I-1053 have narrowed the number of possible solutions. As we move forward, it is important that everyone be as informed as possible. I receive hundreds of questions per week about the budget, the list of possible solutions, and the impact of I-1053. I am dedicating this e-newsletter to this topic to clarify our options and clear up some misperceptions.
The Size of the Problem
The size of this fiscal crisis, a staggering $5.3 Billion shortfall, is the simple difference between forecasted revenues and anticipated spending under current laws. “Anticipated spending” includes vital services we are already providing and expected growth in spending that is required in law but not yet realized. The fact is, even after the Legislature suspends laws to lower expected costs such as teacher COLA’s, there is still a roughly $3 billion deficit that requires cuts to services currently being offered: long-term care hours, basic health insurance for the poor, enrollment funding for higher education access, and much more. Nearly everyone in our State will be impacted. Children in classrooms, access to parks, salaries, pension benefits, environmental protections, and the list goes on.
Options
The preferred option by most is to try and cut our way out of this mess. The House and Senate’s current budget proposals are essentially a picture of what an all-cuts budget looks like (with some fee increases). While an all cuts budget would result in a dramatic decrease in spending, we must ask at what cost. Is it prudent to balance our checkbooks to the detriment of our future potential? As families across our state balance their own household budgets they are not only focused on cost reductions, but they are critically looking for new ways to support themselves. For many, this is a trip back to school, a small business venture, a careful investment that may provide higher dividends in the future, or a second and even a third job. Those that focus only on the immediacy of cuts without regard for future prosperity will get the State Government they deserve.
Another more proactive solution is to closely examine our States revenue and expenditure streams together to try and find inefficiencies, inequalities, and forward thinking options. Just as families must ask themselves how they will grow out of this mess, our State too must look for a long-term solution. It has been decades since the Legislature has reformed, in any meaningful way, our revenue system.
What has changed?
There are three major reasons why Washington State government expenditures continue to erode as a share of our overall state economy. First, is the shift from a goods economy to a service economy. Over 75% of Washington’s economy is in the service sector. However we have lower tax rates, and in some case no taxes for services.. Second, Washingtonians, like most Americans, are shifting a larger portion of their spending to methods and locations that do not collect sales tax, namely Internet based sales. The third problem is that the Washington Legislature has continued to enact more and more tax exemptions, preferences, and loopholes. Currently there are over 600 tax exemptions on the books in Washington State. Some of these exemptions are benefitting our state, some are specious and outdated, but all of them need to be carefully reviewed. I have worked diligently to understand who is and is not sharing their portion of investment in the success of our State.
Baby Steps
I, along with 47 of my colleagues, have introduced HB-2078 which closes a pair of tax preferences – a B&O exemption for Wall Street banks and the sales tax exemption for out-of-state shoppers. Click here to read my press release announcing this effort. Ending those two exemptions would generate $166.8 million for K-3 classrooms in 2011-13, an investment linked to basic education reforms that have stalled due to the $5.3 billion shortfall. This bill poses a simple question: Is there more value to our State by offering Wall Street banks and out-of-state shoppers a tax break or putting those tax revenues directly into the classroom?
I also offered an amendment on the House Floor to SB-5044 that will now allow the Joint Legislative Audit and Review Committee (JLARC) to consider two other factors when they recommend the closure of a tax exemption. 1) Did the tax exemption create full-time, family-wage jobs, with benefits? 2) Did the tax exemption provided create a better return on investment than the typical investments of State government: education, higher education, health-care, and public safety?
Initiative 1053 as a Barrier to a Balanced Approach
I would like to take a moment to lay out, in the simplest terms possible, the effects of I-1053. First of all, this is not the first tax initiative in our state. While I-1053 has some unique qualities, it is the continuation of an ideology that was first passed by the public in 1993 under the title of I-601. The biggest challenge of I-1053 is the requirement to get a 2/3rds majority in both houses to pass any tax increases, including the closing of tax loop holes (I believe few voters realized this latter point when they approved the initiative). Our State Senate has 49 members. With the limitations imposed by I-1053, it only takes 17 of those 49 Senators to stop a legislatively enacted tax increase or loophole closure. Of the 149 members (Both House and Senate) it takes only 17 Senators to block any proposal relating to our tax code. This is the purest definition of tyranny of the minority. The only other route for changes in taxation is through a public initiative or referendum – direct votes of the people. An initiative originates outside of the legislature and requires extensive signature gathering efforts before being placed on the ballot. A referendum requires a simple majority of Legislators to agree to put a measure on the ballot. Fees, on the other hand, can still be approved by a simple majority and you will see many of them increase as part of the final budget.
What’s next?
We will spend the remainder of this session trying to reconcile the House and Senate budgets. Several of us will continue to push for a balanced approach. At a minimum we are demanding that we have floor debate on HB-2078 and other proposals that raise revenue to fund core services. I will also be pushing hard for the more rigorous tax exemption review process proposed in HB-5044. Finally, as session winds down, I will begin to transition to the interim where I will start to outline a comprehensive plan to examine all tax exemptions. I will also begin to outline a framework for a comprehensive tax review. As we begin to set our sights on the 2012 Governor’s race, it will be essential that citizens demand a commitment from every candidate for Governor, that they will make a top priority a comprehensive review of our tax code, including exemptions, preferences, and loopholes. With State government spending now sitting at a lower level per capita than it did twenty years ago, we must demand a more balanced approach if we are going to ensure Washington’s long-term success.