State Budget

Looming Special Session Provides Choices: Responsible Investments in Education and Jobs OR Gimmicks, Cuts, and Decline

Andy Nicholas — 2013-04-26T16:15:53Z

Earlier this week, lawmakers in the House passed HB 2038, a responsible measure that would narrow tax breaks and extend a small tax increase on business services in order to fund court-mandated improvements to schools while preserving health care, public safety, and other investments that create jobs.

The passage of HB 2038 represents the final component of the two-year spending plan put forward by House leaders. That plan follows the path laid out by Governor Inslee earlier this year, but is very different from the budget proposal from leaders in the State Senate.

Unlike the responsible and balanced approach championed by Governor Inslee and members of the House, the Senate’s approach would only make matters worse by subjecting health care, child care, and other investments that help middle class families prosper and kids learn to yet another round of severe cuts.

As the regular 2013 legislative session draws to close, and as lawmakers begin planning for a special legislative session, the stage has been set for a dramatic show down between these two fundamentally different visions for our state. Which direction will they go? Stay tuned to schmudget as events unfold.

Jobs and Education Should Prevail Over Tax Breaks

Andy Nicholas — 2013-04-24T23:18:26Z

Opponents of legislation that would close wasteful tax breaks to build a better education system for all of Washington state’s children are using flawed arguments to try to derail the effort.

House Bill 2038, which passed the House Finance Committee yesterday, would invest about $900 million in schools and expand opportunities for generations to come. To generate the resources needed to modernize our schools, the legislation would close or narrow about $400 million in tax breaks and continue a tax increase on business services that is scheduled to expire at the end of June.

Investing in education is one of the most effective ways of creating middle class jobs and a vibrant, competitive state economy. Yet, at a recent public hearing on HB 2038, a range of corporate special interests erroneously claimed that if they were required to pay the same tax rates as most other businesses in Washington state, they would be forced to fire some of their workers and not hire others. They ignored several facts:

Education is key to building a strong economy: Consistently, businesses cite an educated and skilled workforce as a primary factor in deciding where to locate and create jobs. Investing in high-quality schools fosters economic growth and creates an economy capable of sustaining a strong middle class with well-paying jobs. Unfortunately, per student funding has been consistently cut since the start of the recession, while spending on tax breaks has remained virtually untouched.
Demand for goods and services creates jobs: Washington state’s economy is not struggling because there are too few tax breaks on the books. If tax breaks created jobs, the economy ought to be booming with 640 tax breaks currently in place. Ultimately, businesses hire workers when they expect an increase in demand for their products or services. Consumer demand remains very weak in wake of the Great Recession, which is a big reason businesses in Washington state are not hiring. Tax cuts for businesses, broad or narrow, do little to spur demand among consumers.
Public investments bolster demand for goods and services: Investments in education, health care, and other public services can help stimulate local demand during hard economic times. State and local governments purchase many products and services from local businesses, hire local workers who spend their money at local stores, and contract with local businesses to provide essential services and to build roads, bridges, and other vital economic infrastructure. All of these things help sustain economic demand during tough economic times while laying the groundwork for a more prosperous state economy in the long run.
Many tax break dollars subsidize jobs and shareholders in other states: It is very difficult to ensure that tax break dollars, and their benefits, stay in Washington state. Rather than creating jobs in local communities, a significant portion of tax break dollars pad the profits of corporations and corporate stockholders in other states. That is very likely the case for a number of tax breaks that would end under HB 2038 – such as a high-tech research and development credit claimed by many large software companies, which created few jobs at a very high cost to the state; a complete business tax exemption for importers; and a preferential business tax rate for prescription drug wholesalers that is available to both in-state and out-of-state businesses.
Most tax breaks under consideration have failed performance evaluations or serve no purpose: Of the 11 tax breaks that would be eliminated or narrowed under HB 2038, seven have been reviewed by state auditors. In four of those cases, the auditors found that the tax breaks should be repealed because they failed to create jobs or serve any other valid public purpose. Auditors were unable to measure the performance of the remaining three tax breaks because they could find no measurable purpose for them whatsoever.
Most tax breaks don’t create jobs: State taxes represent a tiny fraction of business’ overall costs. Nationwide, all state and local taxes combined represent between 2 percent and 3 percent of total operating costs for the average corporation and have only a marginal impact on business investment decisions. Moreover, the resources used to finance these poorly designed tax breaks would be far more effectively used to fund education and other public priorities that have a much larger return on investment.

The bottom line is that HB 2038 is a modest but smart step toward creating middle class jobs and a state economy that works for all Washingtonians. Those who claim that tax breaks are needed to create jobs overstate their effectiveness and fail to recognize the economic benefits of investing in better schools for our children.

Senate "Education By Starvation" Proposal Would Fund Education By Cutting All Other Investments

Andy Nicholas — 2013-04-09T18:24:02Z

By Andy Nicholas and Kim Justice -- A plan that State Senate leaders recently revived to fund education at the expense of all other vital services continues to be the wrong approach to fully funding our schools and poses a grave danger to Washington state’s economy. It would lead to deep cuts in investments beyond education that create jobs and help the middle class prosper.

Beginning in 2015, Senate Bill 5895 would attempt to fund court-mandated education reforms by limiting public safety, health care and all other areas of state investment to the rate of inflation plus population growth.

This rigid formula, which was the cornerstone of Rob McKenna’s education funding proposal when he ran for Governor in 2012, ignores the real-world costs of maintaining important investments from one year to the next.

For example, health care costs grow considerably faster than the general rate of inflation. And the aging of our state’s population means that the number of seniors needing health care and other services grows more rapidly over time than the population at large.

As a result, the arbitrary population plus inflation formula would force huge cuts to a range of important non-education investments. But the cuts don’t stop there. The measure would also eliminate Initiative 732, a law requiring annual cost-of-living adjustments (COLA) to teacher salaries. However, policymakers would be required to transfer an amount of funding equal to the cost of these COLAs to education from other areas of state investment, forcing even deeper cuts non-education spending.

The graph below shows the combined impact of the population plus inflation formula and the mandated COLA transfers, had SB 5895 been enacted in 2005. As the graph shows, the Senate proposal would have forced more than $4 billion in cuts to non-education investments between 2005 and 2008.

During the 2005-07 budget cycle alone, SB 5895 would have forced $2.5 billion in cuts to important priorities in Washington state. That’s more than all of the combined funding for public safety ($1.5 billion) and services that support foster children and families in crisis ($500 million).

Funding education at the expense of all the other things that kids need to thrive – strong families, safe neighborhoods, a healthy environment -- is the wrong approach. Instead, Senate leaders should look to generate additional resources for schools by ending unproductive tax breaks, as Governor Inslee proposed, while continuing current taxes that are set to expire and exploring other options, such as a tax on profits from high-end investments and other capital gains.

Senate Budget Chooses New Tax Breaks Over Students, Seniors, and Families

Andy Nicholas — 2013-04-03T23:59:16Z

Not only does today’s budget proposal from the Senate fail to close a single wasteful tax break to help maintain funding for schools, health care, and other important priorities, it deepens state spending on tax breaks, creating 13 new ones.

These new tax breaks will drain available resources by an additional $11 million in the coming 2013-15 budget cycle. Notable highlights include (see full list below):

A sales tax exemption on the purchase of clay targets by non-profit gun clubs ($29 thousand);
A sales and use tax exemption for the sale of financial information to qualifying international investment management firms ($747 thousand);
A sales tax exemption on cover charges for dance clubs ($892 thousand).

At a time when existing state tax resources are projected to fall $2.6 billion short of the amount needed to sustain existing investments and fund court-ordered improvements to Washington state’s education system, it is irresponsible for policymakers create new tax breaks.

Instead, the Senate should follow Governor Inslee’s lead, who, just last week proposed eliminating more than $500 million in wasteful tax breaks to build a stronger education system for Washington state’s children.

Stay tuned to schmudget for additional analysis on the Senate budget.

Budget Beat: Learn more about the Senate budget—and how it compares with Governor Inslee’s budget— at this week’s Budget Beat call this Friday at noon. Register here.

Movement Towards Tax Break Accountability

Andy Nicholas — 2013-03-22T16:29:52Z

As the Legislative Session progresses all three branches of state government have taken, or are poised to take, actions that could greatly enhance transparency over the hundreds of special tax breaks on the books in Washington state.

Although more needs to be done, there have been several encouraging developments, including:

Eliminating the supermajority vote barrier: Earlier this month, the State Supreme Court struck down the law that required a supermajority – two-thirds vote - for tax increases. Among other problems, the supermajority law allowed a small handful of lawmakers to block any attempt to rein in special interest tax breaks.
Unanimous Senate support for greater tax break accountability: Senate bill 5843 would require most new tax breaks to include key transparency requirements – including a sunset date, a clear purpose and policy goals, and specific performance metrics to help state auditors gauge its effectiveness. This bill was passed unanimously by state Senate earlier this year and is waiting for action in the House Finance Committee.
A Disciplined House Finance Committee: All of the transparency and accountability tools in the world would be useless without a commitment among policymakers to foster accountability. With the newly reconstituted Finance Committee, leaders in the House of Representatives are doing just that. The Finance Committee has shown discipline, passing far fewer tax breaks than the Senate Ways and Means Committee and requiring all newly proposed tax breaks to include sunset dates and performance metrics.
Governor to propose narrowing tax breaks for education: Governor Inslee has announced that he will unveil a strategy for funding education that includes eliminating or narrowing unproductive tax breaks, which have in the past compromised the state’s ability to invest in schools.

Over the last two decades, policymakers have dramatically increased their use of tax breaks to further various legislative goals. As the graph below shows, the number of tax preferences on books has nearly doubled since 1990, rising to 640 from 333 over the last 23 years.

But, unlike direct spending on schools or health care services, tax breaks don’t have to go through the biennial appropriations process, despite the fact that they cost the state a large amount of money. This makes it easier to enact tax breaks and difficult to balance against competing public priorities.

History has shown that most tax breaks are poor mechanisms for achieving policy goals, but they have remained popular with policymakers. According the Institute on Taxation and Economic Policy:

“Administering spending programs through the tax code allows policymakers to simultaneously claim that they are taking action on an important issue while also taking credit for cutting taxes, shrinking government, or deferring to the private sector. In reality, however, selectively shuffling around tax burdens leaves no less of an imprint on the economy than direct government spending.”

More reform needed

While recent developments indicate progress toward a more accountable tax break system, more aggressive steps will need to be made to ensure true accountability is achieved. Notably, policymakers should apply sunset dates to most existing state tax breaks – a reform that was proposed last year under HB2762. Such a reform would help policymakers evaluate tax breaks and balance their costs against the need to invest in schools, health care, and public safety.

For more information on how we can bring greater accountability to tax breaks in Washington state, read the Budget & Policy Center brief, Every Dollar Counts: Why it’s Time for Tax Expenditure Reform.

Schools, Colleges Would Get a Much-Needed Boost From Plan to Tax High-End Capital Gains

Andy Nicholas — 2013-02-14T19:18:44Z

As policymakers struggle to fund education and other public priorities, a bill introduced yesterday in the State Senate would provide much-needed resources to our schools by creating a tax on high-end investments and other capital gains that could generate more than $1 billion in every two-year budget cycle.

Senate Bill 5738 would ask voters to approve a new tax on profits from sales of stocks, bonds, vacation homes, art, and other capital gains earned by the wealthiest 2 percent of Washingtonians. The question would be on the November 2013 ballot. In the meantime, the bill would generate other new resources for education by temporarily extending small surtaxes on large beer companies (breweries and distributors) and the service industry that are set to expire in June.

This is a common sense solution to help close the sizeable gap between the amount of revenue the state is taking in and what is required to meet basic public needs. The problem has been greatly compounded this legislative session, as lawmakers must comply with the mandate to fully fund basic education under the state Supreme Court’s McCleary decision.

SB 5738 would invest about $1.3 billion every biennium in essential school improvements, ranging from expanded pre-kindergarten education to greater tuition support for college students (see graph below). The measure would also establish performance goals and benchmarks to ensure children make progress under these reforms and are learning what they need to so they can thrive at every stage of life and help build a stronger Washington economy.

As the graph shows, the legislation would fund:

$730 million in increased investments in education from pre-school to college.
$220 million to reduce class sizes.
$175 million to prevent further tuition increases at 4-year colleges and community and technical colleges.
$89 million for all-day kindergarten at every school.
$55 million for expanded pre-kindergarten learning opportunities.
$6 million to help kids at risk of dropping out stay in school.

The 5 percent tax on capital gains voters would be asked to approve would apply to profits from the sale of corporate stocks, bonds, and other high-end financial assets above $20,000 per year for a married couple. Gains from retirement accounts would be exempt along with those on the sale of farmland, livestock, and timber. Furthermore, the vast majority of ordinary home sales would be exempt under this proposal. Only vacation homes and the most expensive primary residences would be subject to any additional taxes.

The legislation would also extend for another two years a 50-cents-per-gallon increase in the beer excise tax and a 0.3 percentage point business tax increase applied to law firms, accounting firms, hair and nail salons, and other services.

The Budget & Policy Center has done extensive research on the advantages of taxing capital gains. Such profits are heavily concentrated among the richest few Washingtonians, so 98 percent of households would pay no additional taxes under the proposal. In addition, capital gains are rapidly growing, meaning they would help Washington state create a more stable and adequate revenue system in the long run.

For more information about the capital gains tax, check out A Capital Reform: Using Capital Gains to Fuel Job Creation and Economic Prosperity in Washington state and Top 10 Graphs About Capital Gains.

Our recent policy brief, A Paramount Duty: Funding Education for McCleary and Beyond provides more information about these and other important education reforms.

More analysis to come. Stay tuned to schmudget.

Proposed ‘Supermajority’ Amendments Would Protect Latest Tax Loophole for the Wealthy

Andy Nicholas — 2013-02-07T18:15:53Z

In the wake of the State Supreme Court decision to allow wealthy married couples to avoid paying the estate tax on a legal technicality, at great cost to public schools, policymakers should be able to act responsibly and simply close the legal loophole. But thanks to the state law that requires a “supermajority” vote of the legislature to raise revenue, as few as 17 state Senators can block any attempt to rationally solve the problem.

It’s just the latest hurdle caused by the supermajority law, which has resulted in four years of legislative dysfunction and sluggish economic growth. Today, lawmakers are hearing three proposed measures – Senate Joint Resolutions 8200, 8204, and 8205 – which would permanently cement this job-killing law into the State Constitution. At a time when policymakers should be focusing all of their attention on getting more resources to our badly underfunded schools, these proposals are a destructive distraction.

The supermajority law bars policymakers from raising additional tax revenue without a two-thirds majority vote of the legislature or a public referendum. As we’ve written previously, the law, by allowing a small group of lawmakers to block legislation, effectively hands all state budget decisions over to a handful of people who are opposed to raising any additional revenue for any reason.

As a result, this minority of legislators (who represent a small portion of Washington state’s population), has forced the majority to accept round after round of debilitating cuts to vital investments in health care, education, and safe communities. These cuts have eliminated thousands of jobs and hampered Washington state’s economic recovery, taking an enormous toll on struggling Washingtonians from Yakima to Mount Vernon.

If that weren’t bad enough, a recent State Supreme Court decision created an enormous loophole in Washington state’s estate tax, a voter-approved tax that only impacts the heirs of the super-rich. Due to a legal technicality, the Court’s decision (known as the “Bracken decision”) allows wealthy married couples to completely avoid paying estate taxes and shirk their obligation to help support schools. (All revenue from the estate tax is dedicated to education.) The court decision is projected to cost Washington state $160 million in the coming 2013-15 budget cycle, widening the already yawning gap between our needs and the resources we have to meet them.

Not surprisingly, the Washington State Department of Revenue has found that estate planners and lawyers are already developing strategies to help their ultra-rich clients take advantage of the Bracken loophole.

The supermajority has done enough damage to Washington state. Enshrining the law into the State Constitution would make it impossible for the majority to rebuild a state economy that benefits all Washingtonians.

New Bills Promote Economic Security and Transparency

Kim Justice — 2013-02-06T23:43:26Z

Several recently-introduced pieces of legislation would help create jobs, build lasting prosperity, and foster a more transparent and accountable state budget process. These measures, based on our research, would provide more resources and opportunities for struggling workers and families, while giving policymakers and the public more complete information about the ongoing costs and benefits of public investments.

These bills reflect the policy recommendations we made in our Framework for Prosperity to create a strong economy for all Washingtonians.

SB 5638 Fiscal Impacts-would add transparency and accountability to budget decisions by providing lawmakers with more information, including how cuts to one program may impact other areas of the budget. A broader view of the impact of budget decisions will help aid policymakers in making the best, most-informed judgments on how to prioritize state resources. Click here for analysis we did on a similar proposal.

HB 1734/ SB 5643 Exemptions from the five-year time limit for recipients of TANF (Temporary Assistance for Needy Families) - provides more opportunities for people to find and keep a job by curtailing an onerous red tape barrier – an arbitrary time limit that is not connected to the state of the economy --that prevents struggling families from receiving work supports. It would ensure that parents who have disabilities, are victims of domestic violence, or live in areas with high unemployment (among other exemptions) would be able to continue to receive services. Click here for additional research.

HB 1671/ SB 5595 Child care- improves access to affordable child care for parents, supporting their efforts to find or keep a job. The proposed legislation increases the benefit amount provided to parents, allowing them greater access to providers, and establishes a program to reward child care providers for providing high-quality care. Click here for additional research.

Policy Agenda: Framework for Prosperity

Tara Lee — 2013-01-14T23:59:22Z

Investments

•    Education and Opportunity
•    Thriving Communities
•    Healthy People and Environment
•    Economic Security

Revenue

•    Capital Gains
•    Sales Tax
•    Working Families Tax Rebate
•    Strengthening the Rainy Day Fund

INTRODUCTION

This is a crucial time in Washington state’s history. There are choices to be made by our newly elected Governor and state Legislature that will impact millions of Washingtonians.

How to fulfill the requirements of the McCleary school funding decision, which will touch not only education but all areas of the budget?
How to implement the Affordable Care Act, to provide access to health coverage?
What should our priorities be for investing in the building blocks of a strong economy?
How will we pay for all these things?

When I think of the kind of state I want my young son to grow up in, I know every Washingtonian wants the same: a state with safe, thriving communities, healthy people, an environment with clean air and water, jobs that offer economic security for families, and an education that provides opportunities for the next generation. But those values are in jeopardy right now. All of this comes together in one place—the state budget.

It’s a powerful tool for social change and a reflection of our values. In this document, we lay out specific recommendations for targeted investments that would bring our state closer to providing prosperity for all Washingtonians. We also provide revenue options to help pay for those investments.

The measure of our success is a state with the financial resources to invest in what reflects Washingtonians’ values—a state that can create shared prosperity during good times, and during bad times maintains our commitment to progress. This document is a framework to help get us there.

The Washington State Budget & Policy Center staff and I look forward to working with elected officials, advocates, community members, and everyone else who cares about tomorrow’s Washington state to realize this vision.

_Remy Trupin, Executive Director

INVESTMENTS SUMMARY

Widely shared prosperity does not happen by accident. It happens when we deliberately invest in the foundations of a strong economy—broad and equal opportunity to build knowledge and skills, adequate compensation
and support for workers, and targeted investments in conditions that foster
economic growth.

Washington state’s investments should:

Provide opportunity for all. Opportunities that most Washingtonians need to prosper—access to high-quality education, health care, transportation,
clean environment, and work supports—are cost-effective and improve
long-term outcomes for families, communities, and the economy.

Create better jobs. A thriving middle class is dependent on having enough
jobs that allow Washingtonians to get ahead, and policies that reward
workers for their productivity. In addition, jobs that maintain our physical
infrastructure (construction and maintenance on schools, roads, bridges,
transportation) and build knowledge and skills (teachers, job trainers,
social workers) strengthen the foundation of a strong economy.

Bottom Line

When more people have a chance to reach their full potential and enough economic security to make investments in their future, our economy will grow.

Click for specific investment recommendations.

REVENUE SUMMARY

After the worst recession of our lifetime, rebuilding Washington state’s economy must be policymakers first priority. To build a strong state, we need reforms that will create a more robust and stable revenue system that is able to meet the demands of the 21st century economy.

Washington state’s revenue system is:

Behind the times. Our state revenue system hasn’t substantially changed
since 1935. Seventy-seven years ago Washington state’s economy was based
on agriculture, manufacturing, and purchases of tangible goods. Today our
state produces advanced software and other high-tech goods and services that weren’t even imagined in the 1930s.

Losing pace. Just 40 years ago, our revenue system generated 6.9 cents of every dollar of personal income produced in the state. Today it generates only 4.9 cents per dollar of personal income. That’s a 30 percent decline that won’t abate without changes.

Upside-down. State taxes take a much larger bite out of family incomes among lower- and middle-income households compared to the richest households. As a share of their incomes, ordinary Washingtonians can pay up to eight times more in state and local taxes than those at the top of the income scale.

Bottom Line

Instead of de-funding our values with deep budget cuts, Washington state lawmakers should focus on making changes to our revenue system that will rebuild the economy to work for everyone.

Click for specific revenue recommendations.

What an All-Cuts Budget Really Looks Like

Kim Justice — 2013-01-08T23:08:21Z

Washingtonians recently got a glimpse into what the state’s future could look like, and it was bleak. As Governor Gregoire recently laid out in her “Book One” budget, without new revenue, the state is looking at a $900 million gap between its current needs for health care, transportation and other services and the resources it can muster to pay for them. And, believe it or not, that’s a rosy scenario.

It ignores the $1 billion or more the state is also on the hook for to meet a court-ordered mandate to boost school funding. Throwing that into the mix shows that solving our economic problems solely by cutting important public services would be a disaster to the well-being of all Washingtonians and the state’s economy.

Fortunately, the Governor’s own proposal for the next two-year budget cycle, “Book Two,” recognized that it would take new revenue to meet the education funding mandate while maintaining other crucial investments in safe communities, good health, and economic security.

A budget that meets our current obligations and invests in public schools with no new revenue, as many lawmakers suggest we should do, would require over $2 billion in budget cuts.

As the graph shows, such a budget would decimate many things Washingtonians value:

An affordable higher education: Policymakers would have to eliminate all funding to state four-year colleges and universities, along with financial aid for struggling students. That would mean even higher tuition costs for students, putting college out-of-reach for thousands of future workers.
Skilled and motivated teachers: We need to attract the best teachers in order to give our kids the kind of educational edge they’ll need to compete in the 21st century economy. Suspending teacher salary increases would greatly hamper our ability to attract the best and the brightest educators for our children.
Widely available early learning opportunities: Investments in early learning reap enormous dividends for our economy and promote widespread prosperity. Eliminating early learning would place thousands of our children at a disadvantage in later stages of their education.

Governor Gregoire has it right— a budget that meets our needs and fulfills our constitutional obligation to public education must include new revenue.

IN PURSUIT OF PROSPERITY: Eight Strategies to Rebuild Washington State's Economy

Lori Pfingst — 2012-12-06T17:52:34Z

NOW IS THE TIME

This is an historic moment for Washington state. As we recover from economic, social, and fiscal challenges like none seen in most of our lifetimes, we have a tremendous opportunity to become a state where prosperity is widely shared, and children, families, and communities can thrive.

As our newly elected leaders reconvene for next legislative session and beyond, it is important they recognize that widely shared prosperity doesn’t happen by accident. History, supported by persuasive research, proves that prosperity happens when we deliberately invest in the foundations of a strong economy – broad and equal opportunity to build knowledge and skills, adequate compensation and support for workers, and adequate investments in conditions that foster economic growth.

But the opportunities that built a strong middle class – attending quality public schools, access to health care and transportation, affording a home and growing up in safe, healthy neighborhoods – are not as abundant as they need to be. Nor are they equally available to everyone. And even if everyone had access to such opportunities, Washington state simply does not have enough jobs that pay what’s needed for workers and their families to meet basic needs, let alone prosper. Over the last four years, an all-cuts budget approach to dealing with unprecedented declines in state revenue has made matters worse by eliminating jobs and limiting the opportunities Washingtonians need to get ahead.

When more people have a chance to reach their full potential and enough economic security to make investments in the future, our economy will grow. The good news is we know how to do this – we’ve done it before. If policymakers pursue a coordinated set of strategies to accomplish the long-term goals, shared prosperity will follow.

Opportunity for all. Opportunities that most Washingtonians need to prosper – access to high quality public schools, health care, transportation, clean environment, and work supports – are cost-effective and improve long-term outcomes for families, communities, and the economy.

Better jobs. A thriving middle class is dependent on having enough jobs that allow Washingtonians to get ahead, and policies that reward workers for productivity. In addition, public works jobs that maintain our physical infrastructure (construction and maintenance on schools, roads, bridges, transportation) and build knowledge and skills (teachers, job trainers, social workers) strengthen the foundation of a strong economy.

A productive, equitable revenue system. Ensuring abundant and equal opportunity and creating good jobs requires a revenue system that is adequate to sustain public investments. A more equitable revenue system would ensure Washingtonians from all income levels benefit from the economic activity they help generate.

PAVING A PATH TO PROSPERITY FOR ALL

In the period following World War II, the United States experienced an economic boom like no other country. Intentional public policy investments helped to grow a strong middle class and resulted in increased home ownership and educational attainment, a competitive workforce, personal income gains, and a growing number of families achieving economic security.[1]

History teaches a valuable lesson – public investments reap returns by providing the foundations for a strong economy. Every state, as well as every one of the United States peer nations, requires public investment for a thriving business sector, educating citizens, preparing their workforce, and remaining competitive in a global economy.

We have much to learn from this history of prosperity, but we must also acknowledge it was not shared by everyone, nor did we maintain the foundation to make it last. People of color, historically denied access to opportunities, were excluded from most of the economic gains, increasing racial and social inequality. And beginning in the 1980s, public investments that provided opportunity and supported workers and their families were slowly dismantled, hurting the middle class and increasing the number of low income families.[2]

Washington state’s economy will grow and thrive only if all Washingtonians have the opportunities and jobs they need. We’ve got work to do. In Washington state today:

Opportunity is neither abundant nor equal

According to the Opportunity Index,[3] a measurement of the economic, education, health, and civic opportunities for all U.S. counties, no county in Washington state gets a grade of “A” for comprehensive access to high quality education, adequate health care, affordable housing, and safe communities. Just six counties receive a grade of “B” or higher, and the remaining 31 counties receive a grade ranging between “B-“ and “D+” (data was not available for two counties). A different study specific to the Central Puget Sound found that access to opportunity is weak for the region, with people of color having the least access. Just four of every 10 residents in the Central Puget Sound region have access to high opportunity, and Black, Hispanic, and American Indian residents had less access than White and Asian[4] residents (Figure 1).

The job market is comprised of mostly low-paying work

Unemployment in Washington state remains high (8.5 percent),[5] largely because not enough jobs are available to meet the demand. While jobs have grown steadily since the recession officially ended in June 2009, fewer than half (48 percent) of the 154,000 jobs lost during the recession have been recovered.[6] Jobs in the private sector are increasing, but these gains have been partially offset by losses in the public sector, hurting our overall economic recovery.[7]

Equally important, most of the jobs available in Washington state do not pay what’s needed for workers and their families to get ahead. Fifteen of the 20 occupations with the most job openings pay below what a family of four needs just to meet basic needs, like having enough food, adequate housing, and affordable child care and health care. Eighteen out of 20 pay less than what a single parent with two children needs (Figure 2).

While meeting basic needs is an important benchmark, true progress would mean that more people have enough disposable income to invest in assets – a home, saving for retirement, or a child’s education – that build long-term wealth and economic security.

Unfortunately, that is unlikely to happen given the present composition of Washington state’s future labor market. Conservatively assuming families need 15 percent more than just a basic needs wage to actually step onto a path of prosperity, 71 percent of jobs in 2019 will not pay enough on average ($56,762) for a family of three to get ahead on one income (Figure 3).

Washington’s job market has a bright spot in that we are a leader in the nation for higher skill, higher paying STEM (Science, Technology, Engineering, and Mathematics) jobs,[8] but STEM occupations make up just 8 percent of the total labor market.

Our flawed revenue system cannot support investments that create opportunity and better jobs

Over the last 20 years, revenues as a share of Washington state’s economy have declined by 30 percent (Figure 4),[9] crippling policymakers ability to make investments that would build opportunity, create jobs, and strengthen our economy.

Washington state has a 1930’s tax system that is wholly inadequate for a 21st century economy. When our tax system was put into law during the 1930’s, the economy was largely driven by agriculture and the production and sale of manufactured goods. At the time, a sales tax on goods reflected most consumer activity. Over time, however, Washington state’s economy – like the rest of the nation – shifted away from manufacturing toward being a primarily service-based economy. Consumers have been spending more on services than manufactured goods since the 1970s, but there has been no significant corresponding shift to the tax code (Figure 5). Without reforms that reflect this and other changes in the economy, our revenue system will fall ever farther behind, starving the state of resources needed to support public investments in opportunities and jobs.

To make matters worse, our revenue system is “upside-down,” which means low- to middle-income families pay a far greater share of their income to support our state investments (17 percent and 11 percent, respectively) compared to wealthy families (5 percent) (Figure 6). Generating revenue through a tax system that places the responsibility on those who are least able to contribute is not only unjust, it doesn’t make economic sense. Substantial economic activity among wealthy families is not included. In addition, this flawed system increases income inequality by giving a big break to the highest income earners, while low- to middle-income families reap little reward from the economic activity they help generate (also Figure 6).

STRATEGIES TO BUILD SHARED PROSPERITY

Washington state is caught in a vicious cycle. We lack opportunity and good jobs, as well as the revenue needed to make investments that help to create opportunities and good jobs. Policymakers can reverse this cycle by ensuring opportunities are abundant and equal, creating better jobs, and fixing our flawed revenue system. Eight strategies can rebuild the middle class and make our economy work for everyone.

GOAL: Opportunity for All

People can’t take advantage of opportunities that don’t exist. Increasing public investment in equal opportunity lays the foundation for greater economic security for children and families, improved social well-being and health outcomes, and a well-educated, globally competitive workforce.

STRATEGY: Provide a high quality basic education to all students

Provide high quality universal preschool. Children who attend preschool are more likely to be school-ready and have better academic and social outcomes than children who don’t attend. Families and businesses benefit from having access to care for children so parents can work. High quality preschool is one of the most effective workforce development tools available, preparing the next generation of children to meet the demands of Washington state’s future economy.[10]

Target resources to close the K-12 racial achievement gap. Forty-four percent of babies born in Washington state are children of color.[11] Due to unequal access to opportunity and lower family economic security, these children – Washington’s children – fare worse than their white peers on nearly every indicator of well-being.[12] Ensuring that children of color and their families have the services they need to succeed in school is essential to their future, as well as our economy.

Investment in public universities and community and technical colleges. Washingtonians who attend college –especially those who obtain an Associate’s or Bachelor’s degree – are more likely to work full-time and have higher incomes[13] than those with a high school degree or less.[14] In addition, public universities and community colleges provide the labor market with students who have the training, knowledge, and skills to keep Washington state globally competitive.

STRATEGY: Protect public health and the natural environment

Fully implement the Affordable Care Act. Access to quality, affordable health care is key to Washington state’s economy because it creates a healthy workforce, reduces overall costs, and helps children do better in school. Full implementation of the federal Affordable Care Act, including the adoption of the federal basic health plan, Medicaid expansion, and the creation of the exchange, will provide coverage for 800,000 currently uninsured Washingtonians. Having more people insured will reduce the costs of uncompensated care, and save the state $200 million in the first two years of Medicaid expansion alone.[15]

Protect investments in clean air, water, and land. Living in communities with access to clean water, and free of air pollution and toxins are essential to maintain public health and quality of life.

STRATEGY: Support economic security of children and families during tough times

Increase access to food, housing, and support services. Helping families meet basic needs in tough economic times is essential for child and family well-being and more cost-effective than letting people slip through the cracks of a poor economy.[16] The State Nutrition Assistance Program (food stamps) and Home Security Fund and Housing Trust Fund (affordable housing) reduce hunger among children, and increase the stock of affordable housing so families have a foundation from which to rebuild. Support services for domestic violence, substance abuse, and mental health provide stability for children and families and connect people to life-saving resources.

STRATEGY: Reprioritize state spending to build thriving communities

Implement more stringent cost-benefit analysis of tax breaks. Hundreds of narrow tax breaks for a variety of industries and individuals amount to billions of dollars in foregone state resources each year – resources that would be far more effectively invested in the opportunities that benefit most Washingtonians. Many tax breaks have no proven economic benefit for the state. For example, state auditors recently reviewed a business tax credit aimed at improving employment in the high-tech industry, and found the credit raised employment in the high-tech sector by less than 1 percent, with a total price tag of $20 million per year or about $45,000 per job created.[17]

GOAL: Better jobs

Policymakers need to recognize that jobs overwhelmingly don’t pay enough to let families get ahead. People that work hard should be rewarded through adequate compensation and a guarantee of meeting basic needs for their family. Public investment supports jobs that pay middle-class wages, like teaching, nursing, firefighting, and law enforcement, and also strengthens communities by maintaining our state infrastructure.

STRATEGY: Invest in public works jobs

Fix infrastructure and build human capital.[18] Increasing investment in public works – like roads, bridges, schools, parks, and transportation systems – projects creates jobs and maintains the quality of the infrastructure that is critical to an efficient workforce and flow of goods throughout the state. In addition, investing in jobs that educate children and protect communities strengthen our workforce. Targeting public works job creation in areas hardest hit by unemployment can get people back to work quickly and stabilize low income communities.[19]

STRATEGY: Make work pay

Strengthen worker rights and work supports.[20] Policies that incentivize work and support employees in their relationships with employers are critical to rebuilding the middle class and an economy that works for everyone. Being in a union, for example, is associated with better wages and working conditions, particularly among workers in lower-paying fields. In addition, unions have reduced gaps in income inequality and improved workplace conditions for women and people of color, who are more likely to face wage discrimination. In addition, policies that support low income families in finding or keeping a job, like Temporary Assistance for Needy Families/WorkFirst and Working Connections Child Care, prevent people from slipping through the cracks of a weak economy.[21]

Fully fund the Working Families Tax Rebate (WFTR). The WFTR is Washington state’s version of a state Earned Income Tax Credit, one of the most powerful tools for rewarding the work of low income families. Passed in 2008, but yet to be funded, the WFTR is modeled after the highly successful federal EITC and will reduce taxes for about 400,000 working Washingtonians and their children once fully funded.[22]

Goal: A Productive, Equitable Revenue System

Washington state will not be able to make the investments in opportunity and jobs until we fix our flawed revenue system. We also can’t rebuild the middle class if we don’t ensure that people from all income levels benefit from the economic activity they generate.

STRATEGY: Modernize the tax system for a 21st century economy

Expand the sales tax to include more services. A sales tax that includes services would reflect today’s purchasing patterns and generate at least $100 million per year in additional revenue, depending on the number of services added. [23]

STRATEGY: Make the tax system equitable

Shift greater tax responsibility to those most able to pay. Flipping our upside down revenue system so that high income families pay a greater share of their income in taxes and low- and middle-income families pay the least could generate more resources for public investments in opportunity and help to reduce income inequality. Enacting a capital gains tax, for example, would generate some $700 million annually and only the top 2 percent of income earners in Washington state would pay it.[24] If paired with tax credits for low- to middle-income families, like a refundable state-level child tax credit[25] and property tax circuit breakers,[26] tax reform could help even more to reduce income inequality and promote prosperity.

CONCLUSION

Now is the time to rebuild Washington state’s economy and tap into the full potential of our residents. With an economy in recovery, a history to build upon, and a strategy to pursue we can put prosperity within everyone’s reach. Investing in the foundations of a strong middle class – abundant and equal access to opportunity, better jobs, and an adequate revenue system that promotes equality – will get us there.

Click below to listen to an audio presentation of this paper.

SOURCES

1. Reich, Robert (2010) Aftershock: The Next Economy and America's Future. Vintage Books/Random House.

2. Reich, Robert (2010) Aftershock: The Next Economy and America's Future. Vintage Books/Random House.

3. A measure created by Opportunity Nation, in partnership with Measure America and the Social Science Research Council, to capture the economic, education, health, and civic opportunities for all U.S. counties. Downloaded from opportunityindex.org on September 27, 2012.

4. Data systems do a poor job of collecting detailed information on people of color. The Asian category, in particular, hides significant disparities within the Asian population. For example, people who emigrated from Southeast Asia tend to fare worse on numerous indicators of well-being than people who emigrated from China, Japan, or India. The data presented on opportunity likely conceal these disparities and efforts should be made to better understand the barriers facing Asian residents in Washington as well as people from other racial and ethnic backgrounds.

5. Washington State Employment Security Department (September 2012) Monthly Employment Report downloaded on October 23, 2012 from https://fortress.wa.gov/esd/employmentdata/docs/economic-reports/current-monthly-employment-report.pdf.

6. Data is based on the loss of jobs between December 2007 and June 2009, and the number of jobs gained since the recovery started in June 2009. Data received from Chris Thomas, Labor Economist with the Washington State Economic Security Department.

7. B&PC analysis of seasonally-adjusted Historical Employment Statistics from Washington State Employment Security Department and Bureau of Labor Statistics data.

8. Economic Modeling Specialists (June 20, 2012) The Number and Proportion of STEM Jobs by State downloaded on October 9, 2012 from http://www.economicmodeling.com/2012/06/20/the-number-and-proportion-of-stem-jobs-by-state/. The definition of STEM consists of eight high-level categories (see here for all 93 five-digit occupations): computer specialists (SOC 15-1); mathematical science occupations (15-2); Engineers (17-2); drafters, engineering, and mapping technicians (17-3); Life scientists (19-1); Physical scientists (19-2); Social scientists and related occupations (19-3); Life, physical, and social science technicians (19-4).

9. We measure the size of our revenue system over time by dividing total revenues per year by aggregate personal income per year.

10. Bainbridge, Jay, Marcia K. Meyers, Sakiko Tanaka, and Jane Waldfogel. 2005. "Who Gets an Early Education? Family Income and the Enrollment of Three- to Five-Year-Olds from 1968 to 2000*." Social Science Quarterly 86:724-745; Bhargava, Deepak , Timothy Casey, John Cavanagh, Karen Dolan, Peter Edelman, Barbara Ehrenreich, Sarita Gupta, Dedrick Muhammad, Diana Pearce, Steve Savner, and Kevin Shih. 2010. "Battered by the Storm: How the Safety Net Is Failing Americans and How to Fix It." Institute for Policy Studies, Center for Community Change, Jobs with Justice, & Legal Momentum, Washington, DC; Cancian, Maria and Daniel R. Meyer. 2004. "Alternative Measures of Economic Success among TANF Participants: Avoiding Poverty, Hardship, and Dependence on Public Assistance." Journal of Policy Analysis and Management 23:531-548; Edelman, Peter B. 2009. "Changing the Subject: From Welfare to Poverty to a Living Income." Northwestern Journal of Law and Social Policy 4:14-29; Greenberg, Mark, Indivar Dutta-Gupta, and Elisa Minoff. 2007. "From Poverty To Prosperity: A National Strategy To Cut Poverty In Half." Center for American Progress, Washington, DC; Heckman, James J. 2011. "Invest in Early Childhood Development: Reduce Deficits, Strengthen the Economy." The Heckman Equation.

11. B&PC analysis of U.S. Census Bureau’s 2011 Population estimates.

12. For a sampling of data showing disparities between children of color and their white peers, visit the KIDS COUNT Data Center at http://datacenter.kidscount.org/wa.

13. Washington State Board of Community & Technical Colleges (2005) Building Pathways to Success for Low-Skill Adult Students: Lessons for Community College Policy and Practice from a Longitudinal Student Tracking Study (The “Tipping Point” Research) (http://www.sbctc.ctc.edu/docs/data/research_reports/resh_06-2_tipping_point.pdf)

14. Mirowsky, John, and Catherine E. Ross. 1998. "Education, Personal Control, Lifestyle and Health: A Human Capital Hypothesis." Research on Aging 20:415-49.

15. Washington State Budget & Policy Center (June 18, 2012) Series on Health Care Reform (http://budgetandpolicy.org/health-reform-will-increase-care-reduce-costs)

16. Edelman, Peter B. 2009. "Changing the Subject: From Welfare to Poverty to a Living Income." Northwestern Journal of Law and Social Policy 4:14-29.

17. Washington State Budget & Policy Center (2011) Every Dollar Counts: Why it's Time for Tax Expenditure Reform (http://budgetandpolicy.org/reports/every-dollar-counts-why-its-time-for-tax-expenditure-reform/pdf_version); Bartik, Timothy, Kevin Hollenbeck. 2012 "An Analysis of the Employment Effects of the Washington High Technology Business and Occupation (B&O) Tax Credit" Washington Joint Legislative Audit and Review Committee

18. Bhargava, Deepak , Timothy Casey, John Cavanagh, Karen Dolan, Peter Edelman, Barbara Ehrenreich, Sarita Gupta, Dedrick Muhammad, Diana Pearce, Steve Savner, and Kevin Shih. 2010. "Battered by the Storm: How the Safety Net Is Failing Americans and How to Fix It." Institute for Policy Studies, Center for Community Change, Jobs with Justice, & Legal Momentum, Washington, DC.; Cancian, Maria and Sheldon Danziger. 2009. "Changing Poverty and Changing Antipoverty Policies." Pp. 1-31 in Changing Poverty, Changing Policies; Danziger, Sheldon. H. 2007. "Fighting Poverty Revisited: What Did Researchers Know 40 Years Ago? What Do We Know Today?" Focus 25:3-11.

19. Dillahunt, Ajamu, Brian Miller, Mike Prokosh, Jeannette Huezo, and Dedrick Muhammad. 2010. "State of the Dream 2010: Jobless and Foreclosed in Communities of Color." United for a Fair Economy, Boston, MA; PolicyLink (2012) America’s Tomorrow: Equity is the Superior Growth Model

20. Bhargava, Deepak , Timothy Casey, John Cavanagh, Karen Dolan, Peter Edelman, Barbara Ehrenreich, Sarita Gupta, Dedrick Muhammad, Diana Pearce, Steve Savner, and Kevin Shih. 2010. "Battered by the Storm: How the Safety Net Is Failing Americans and How to Fix It." Institute for Policy Studies, Center for Community Change, Jobs with Justice, & Legal Momentum, Washington, DC.

21. Edelman, Peter B. 2009. "Changing the Subject: From Welfare to Poverty to a Living Income." Northwestern Journal of Law and Social Policy 4:14-29; Greenberg, Mark, Indivar Dutta-Gupta, and Elisa Minoff. 2007. "From Poverty To Prosperity: A National Strategy To Cut Poverty In Half." Center for American Progress, Washington, DC.

22. Washington State Budget & Policy Center (2012) Working Families Tax Rebate Would Promote Success in School and Work (http://budgetandpolicy.org/schmudget/working-families-tax-rebate-would-promote-success-in-school-and-work/?searchterm=working families tax rebate) and Washington State Budget & Policy Center (2009) Working Families Tax Rebate: A Tool for Economic and Fiscal Recovery (http://budgetandpolicy.org/schmudget/working-families-tax-rebate-a-tool-for-economic-and-fiscal-recovery/?searchterm=working families tax rebate)

23. Washington State Budget & Policy Center (2010) Modernizing the Sales Tax (http://budgetandpolicy.org/schmudget/modernizing-the-sales-tax/?searchterm=sales tax)

24. Washington State Budget & Policy Center (2012) A Capital Reform: Using Capital Gains to Fuel Job Creation and Economic Prosperity in Washington State (http://budgetandpolicy.org/reports/a-capital-reform-using-capital-gains-to-fuel-job-creation-and-economic-prosperity-in-washington-state/?searchterm=capital gains)

25. Edelman, Peter B. 2009. "Changing the Subject: From Welfare to Poverty to a Living Income." Northwestern Journal of Law and Social Policy 4:14-29; Greenberg, Mark, Indivar Dutta-Gupta, and Elisa Minoff. 2007. "From Poverty To Prosperity: A National Strategy To Cut Poverty In Half." Center for American Progress, Washington, DC.

26. Washington State Budget & Policy Center (2007) Balancing Equity and Reform with a Prosperty Tax Circuit Breaker (http://budgetandpolicy.org/reports/balancing-adequacy-and-equity-with-a-property-tax-circuit-breaker/?searchterm=property tax circuit); Institute on Taxation and Economic Policy, (ITEP). 2010. "Credit Where Credit is (Over) Due: Four State Tax Policies Could Lessen the Effect that State Tax Systems Have in Exacerbating Poverty."

No Matter How You Slice It, Shortfalls Ahead

Kim Justice — 2012-11-15T19:23:03Z

Today’s state revenue forecast made our fiscal challenges crystal clear. Those who hoped that robust revenue gains would solve our budget woes will be forced to face reality with the latest forecast. Over the next four years, revenues will fall approximately $4.8 billion short of meeting our needs.

Legislation that passed during the 2012 session requires the legislature to balance the budget beyond the typical two-year budget cycle, to extend into the following two budget cycles – four years in total (SB 6636). Due to slow projected growth in revenue, the state budget will fall $904 million short of simply maintaining our current commitments in the next two years, and fall an additional $168 million short in the two years after. But that is only part of our challenge.

While the new four-year budgeting requirement excludes the cost of basic education in the shortfall estimates, we cannot ignore our obligations set forth in the state constitution and mandated by the State Supreme Court in the McCleary decision. The decision requires that progress be made towards fully funding basic education by 2018. To do that will require a minimum of $3.6 billion in the next four years.

Accounting for the costs to fund basic education, plus maintaining current services, puts the shortfall at $2 billion in the next two-year budget cycle and $2.8 billion in the 2015-17 biennium (see graph).

It is impossible to solve this challenge through an all-cuts approach. Two billion dollars cut out of the budget in the next two years could result in elimination of important public priorities such as: (1)

Early learning ($112 million)
State support to four-year universities ($1 billion)
Food assistance ($24 million)
Compensation for victims of crime ($18 million)
Supervision of jail offenders ($33 million)
HIV prevention and treatment ($37 million)
Health benefits for thousands of children ($47 million)
Financial aid for college students ($665 million)

Those are choices we can’t afford if we want to improve our economy, protect public safety, ensure a bright future for our children, and get people back to work. Fortunately, there is a better path forward- one that involves raising revenue so we can make the investments we know build a more prosperous future.

New revenues could be generated quickly and efficiently by adopting a new tax on high-end capital gains, updating the 80-year old sales tax to include modern goods and services, and curtailing wasteful tax breaks that don’t create jobs.

1. House Office of Program Research, Senate Committee Services: http://www.leg.wa.gov/JointCommittees/EFTF/Documents/jtfef%20November%202012%20Final.pdf

Federal Government Will Pick up the Tab for Medicaid Expansion

Kim Justice — 2012-10-12T18:16:35Z

Beginning in 2014, Washington state has an opportunity to benefit from billions in federal funding, while covering hundreds of thousands more people with health coverage.

For the first three years (2014-16), the federal government will pick up 100 percent of the costs to cover those who gain eligibility under the expansion of Medicaid. Beginning in 2017, the federal contribution begins to gradually taper down until it settles at 90 percent in 2020 and every year after. That means our state will contribute a mere 10 cents for every dollar the federal government pays.

This is a deal Washington state cannot afford to pass up. Doing so would cost our state roughly $10 billion in lost federal funds over seven years (2014-20).

This is the second post in our series on Why Medicaid Expansion is a Good Idea. To see the full info graphic click here.

Nearly 350,000 Will Gain Health Coverage Under Medicaid Expansion

Kim Justice — 2012-10-10T22:22:48Z

One in six (948,000) Washingtonians under age 65 currently lack health insurance, that's a significant increase from 141,000 at the start of the recession in 2008-2009.(1) But it doesn't have to be this way, lawmakers have an opportunity to turn those figures around. A key provision in the Affordable Care Act allows states to expand Medicaid to individuals who earn less than $15,415 or about $26,300 for a family of three.

Medicaid expansion will reduce the number of uninsured people by:

Allowing low-income adults without dependent children to enroll; and
Raising the income level for eligibility, so that people with incomes up to 138 percent of the federal poverty level qualify.(2)

It is estimated that once fully implemented, expansion of Medicaid in Washington state will provide nearly 350,000 people with health coverage (see graph). Of those enrolled, three out of four are people who will be newly eligible under the expansion. The remainder are people who are currently eligible for Medicaid, but have not enrolled — the majority of them (52,000) are children.

This is the first in our series on Why Medicaid Expansion is a good idea. To view the full info graphic click here.

1. Current Population Survey, 2011

2. Based on 2012 federal poverty guidelines; the Affordable Care Act expands Medicaid eligibility to 133 percent FPL. In addition, there is a five percentage point income disregard, effectively raising the eligibility to 138 percent FPL. Eligibility for pregnant women remains at 185 percent FPL, and eligibility for children remains at 300 percent FPL.

Infographic: Four Reasons Why Medicaid Expansion is a Good Idea

Michael Mitchell — 2013-04-10T16:53:00Z

By Kim Justice and Michael Mitchell

With big changes on the way under federal health care reform, one major decision facing lawmakers is whether or not to opt-in to one of health reform’s biggest provisions: expansion of Medicaid.

This is a no-brainer. Federal expansion of Medicaid is a good deal for states. In Washington state, it would expand coverage to hundreds of thousands of uninsured and save the state money. Check out our info graphic for four reasons why Medicaid Expansion is a good idea.

For more information on healthcare reform in Washington state, check out our series on Health Reform - Increase Care, Reduce Costs.

For a printable version, click here.