Washington State Budget Deficit Now $2.6 Billion in the Hole

Bad news for Washington State continues as declining tax revenues now put the state budget deficit at $2.6 billion. The November forecast by the Washington State Economic and Revenue Forecast Council projected an additional decrease of $760 million in revenue over the previous forecast.

This $2.6 billion deficit is the decrease in revenue projected through June 30, 2011 of the current biennial budget cycle. In a press release from the State Office of Financial Management Governor Chris Gregoire comments that:

“Since the Legislature left in April, our revenues have continued to decline …. Our projected shortfall for the remainder of the biennium is an additional $2.6 billion, for a total gap this two-year budget period of $11.6 billion. That’s almost a third of our last budget. We have not seen a shortfall like this in 80 years.”

In a transcript of comments by Governor Gregoire posted on NPI Advocate, Gregoire stresses the seriousness and severity of the shortfall and states that:

“An all cuts budget is not the value of the people of the State of Washington. We must step up, do our responsibility to this State, and look for revenue to get the job done.”

This will not be an east task.  First off the Legislature will have to repeal Tim Eyman’s I-960 which requires the Legislature to pass by a 2/3 vote any tax or revenue increase or put it to a vote of the people. .  Under I-960 Eyman also required that the repeal of any existing tax exemption also required a 2/3 vote of the Legislature or a vote of the people. The Legislature needs to step up and do this.  The rejection of Eyman’s I-1033 should give Legislators the needed courage to act to address the state’s budget needs as voters overwhelming rejected Eyman’s budget freeze proposal.

The Legislature has rested any real tax reform for years. We have a regressive tax structure on the state level that relies heavily on sales taxes.  Last year some 54% of state tax revenue came from sales taxes.  But as noted by Dr Arun Rahna in the press release from the Office of Financial Management:

“State revenues suffer when consumers hold back. The change in the revenue forecast is due mainly to a revised estimate of when households will regain the confidence to spend on the goods and services taat are subject to state taxes.”

Meanwhile Washington State is 1 of only 7 states that do not have an income tax. Yet the conservative Tax Foundation says that we rank 8th highest in the country in terms of income per capita.

As a result we have once again been ranked as the most regressive states in the nation in terms of our state and local tax structure.  In the November 2009 Report by the Institute for Taxation and Economic Policy entitled “Who Pays?  A Distributional Analysis of the Tax Systems in all 50 States“, Washington State is rated as the most regressive state in the country.

As quoted on the Seattle PI blog Strange Bedfellows:

“The lack of a progressive income tax to offset regressive sales and excise taxes, as well as property taxes, is the most important factor in making the Washington tax system so regressive. Taxes ought to be based on people’s ability to pay them, which means that the share of income paid in tax should rise as income grows, not fall sharply as is the case in Washington,” said Matthew Gardner, executive director of the Institute for Taxation and Economic Policy and the report’s lead author.

As the “Who Pays?” Report notes, in Washington State, the poorest 20% of non-elderly taxpayers pay 17.3% of their income in taxes, the middle 60% pay 9.5%, and the top 1% pay only 2.9% of their income in taxes. Unless this disparity is corrected, any tax increase by the Legislature, like raising sales taxes or property taxes will only increase the tax burden on lower income taxpayers.

It’s time for the citizens of this state and its political leaders to mount a real campaign for tax reform to correct the regressiveness of our tax system. Implementing a progressive income tax; while reducing regressive taxes like sales taxes; and either expanding the current Homestead Exemption now limited to low income seniors and the disabled or adding circuit breaker legislation to help low income homeowners and renters; are changes that need serious consideration and action.

The state is waiting for leadership. The question is who will step forward.  There is no better time than now to reform our tax system. If we don’t reform our broken system we can expect more measures like I-1033 to continue to fill this vacuum of leadership by progressives and liberals and those in the middle.