As a result of the Great Recession, Washington state has taken a significant step backward in funding the key areas that preserve our quality of life and economic prosperity.

The current budget  (2009-11 biennium) will spend 10 percent less than the amount necessary to maintain our previous commitments in education, communities, health care, and economic security.

As the graph shows, the cuts already made have meant:

•    Investments in education and opportunity- from preschool to universities – have been cut by 11.3 percent. This, despite the fact that broadly available education and opportunity is fundamental to the future of our state.

•    Programs that create thriving communities- such as public safety and balanced economic development – have been cut by 7.3 percent. Public investments that maintain our state infrastructure and protect our natural resources create thriving communities. Public structures such as transportation, communications, justice, and the arts keep our state economy in motion, our neighborhoods safe, and our cultural life vibrant.

•    Efforts to ensure the health of people and our environment have been cut by 9.3 percent even though good health allows people to participate in the social, economic, and cultural opportunities of their community. And healthy environment ensures food, water, and recreation without fear of pollution or toxins.

•    State spending on supports that provide economic security has been reduced by 9.7 percent. Supports such as child care and health care are often needed to make employment practical and possible. For those who can’t work or have lost their jobs, help is sometimes needed to meet basic needs.

These figures do not include the impact of several ballot measures this fall that would further reduce resources for critical priorities. The passage of measures like Initiative 1107 (affecting common and reasonable taxes on unessentials like candy, gum, bottled water and soda) or of liquor deregulation Initiatives 1100 and 1105 would come on top of the cuts that have already been made.

The report uses the  Budget & Policy Center’s Progress Index, created to track how well the state does in key areas that determine our quality of life and values.

Please see the entire paper here.

Given high unemployment and the ongoing recession, President Obama’s proposal to let the Bush tax cuts for high-income people expire at the end of the year is fiscally responsible. The savings would be approximately $40 billion in 2011 alone.  

Over the longer term, allowing the continuation of tax cuts for people with incomes over $250,000 would add nearly $1 trillion to the federal deficit over the next decade. On the other hand, allowing these high-end tax breaks to expire would raise significant revenue for important priorities such as education and health care and give us a far better long-term fiscal outlook.

Even a temporary extension of the Bush tax cuts would be detrimental to our economy. A one or two-year extension would not stimulate job creation and economy growth, add significantly to the growing federal deficit, and open the way for the cuts to become permanent.

Furthermore, extending the tax cuts would do little for small business, as only 3 percent of people with any business income would benefit.

According to the Center for Budget and Policy Priorities, a job-creation tax incentive would yield far greater results. Read the report here.

This afternoon, the Office of Financial Management (OFM) released fiscal impact estimates for all six of the citizen initiatives slated to appear on the November Ballot.  Their analyses show that four of these initiatives would likely reduce state resources in the coming years, greatly hampering our ability to maintain key public priorities like health care and education while the economy recovers.  Initiative 1098, on the other hand, would generate new resources for health care and education via a new tax on high incomes while lowering taxes for homeowners and small businesses. 

Initiatives shown to be harmful to public priorities include:

• Initiative 1082 (Net state impact indeterminate, but likely negative):  This measure would allow private insurers to sell industrial insurance policies (also known as Worker’s Compensation) in Washington State. For injured workers, industrial insurance covers the costs of medical care, missed time at work, and provides a pension for those who are unable to return to work as a result of a serious injury.  Under the current system, large employers are allowed to provide their own industrial insurance – that is, they “self-insure” – while most other employers purchase public, or “State Fund” insurance through the Department of Labor & Industries (L&I).  Due to a number of unknown factors, the net cost of I-1082 to the state is yet unclear.  However, the analysis from OFM identifies a range of potential costs – including lost premium payments from state employees, higher administrative and oversight costs for the Office of the Insurance Commissioner and L&I, legal costs associated with higher numbers of rejected injury claims, and others – which add up to $202 million over the next five years.  The analysis found that revenues from additional insurance premium taxes, business & occupation taxes, and fees paid by new private insurers would amount to only $61 million-75 million over the same period.
• Initiative 1100 (5-year cost to the state General Fund: $115 million-123 million):  Initiative 1100 would privatize the sale and distribution of liquor in Washington state, allowing hard liquor to be sold in grocery stores, convenience stores, and other retail outlets.    The Office of Financial Management estimates that I-1100 would cost the state some $51-57 million in the coming 2011-13 biennium due to lost liquor liter taxes and sales taxes, state liquor store profits (markup revenues), sales of state lottery products at state liquor stores, and other factors.
• Initiative 1105 (5-year cost to the state General Fund: $513 million-547 million): Like I-1100, I-1105 would privatize the sale of hard liquor in Washington State.  There are several key differences between the measures, which are explained more fully in following policy brief.  Notably, I-1105 would repeal all taxes currently levied on liquor, along with profits (markup revenues) from state liquor stores. According to OFM, the loss of these revenue sources and others would cost the state $181 million-195 million in the coming biennium.  It is important to note that I-1105 would instruct the Liquor Control Board to develop and present to the legislature a new per-liter liquor tax designed to recoup this lost revenue.  (Nothing in the measure requires the legislature to act on this recommendation.) However, OFM is required to base their estimates on existing state law; they are not allowed to assume or anticipate future legislative changes.1
• Initiative 1107 (5-year cost to the state General Fund: $352 million):  This measure would repeal a portion of the revenue package that was enacted earlier this year to prevent painful cuts in numerous essential public services.  Specifically, the measure would repeal common and reasonable taxes on candy, gum, bottled water, and soda, and would reopen two wasteful business tax loopholes.  Should these taxes be repealed, OFM estimates the state would lose $55 million in the current fiscal year, and another $218 million in the coming 2011-13 biennium.

These initiatives would drain our state of essential resources at a time when the economy continues to wreak havoc on the state budget.  When policymakers gather in January to develop our state budget for the coming 2011-13 biennium they will face a projected $3 billion imbalance between the needs of our state and available resources to pay for those needs.  These initiatives would make our budget situation far worse and could force legislators to enact deep and painful cuts in important public systems like child care, education, health care, and public safety. 

Another measure to appear on the ballot this November, I-1098,  would cut taxes for homeowners and small businesses while generating  additional resources for health care and education by establishing a new tax on high incomes (over $400,000 for couples; $200,000 for singles).  Today’s analysis from OFM shows that I-1098 would net more than $1.6 billion per year for these important priorities.

For more information on I-1098, I-1100, I-1105, and I-1107, read the Budget & Policy Center’s latest policy brief.

1. Initiative 1053, another measure to appear on the November ballot, would reinstate a requirement that all tax increases be subject to a public referendum vote or a supermajority vote in the state legislature.  If approved, I-1053 would make it much more difficult for lawmakers to enact the per-liter tax developed by the LCB.

Update (Aug. 10, 2010): The U.S. House joined the Senate in approving this critical aid to states.

The U.S. Senate voted this morning in support of $26 billion in additional federal assistance for states -- including $338 million for Washington.

The bill, which is moving toward final passage in the Senate, comes at a critical time.

Given declines in the state’s revenue forecast and in recent revenue collections reports, this amount would likely be enough to barely balance the current state budget -- obviating any immediate need for a special session or Governor-ordered across-the-board cuts.

The much-needed funding comes at a time when the state has already cut $4 billion in cuts in response to the effects of the recession and faces an additional shortfall  in maintaining essential services in the coming biennium.

Without the funding, the state would have faced an even bigger budget challenge in preserving priorities like education, health care and environmental protection.

The bill would also include an additional  $200 million to prevent teacher layoffs at a critical time.

As part of last year’s Recovery Act, states received federal assistance through an increase in federal matching dollars on state Medicaid spending.  This aid has helped our state weather the impacts of the national recession by preventing damaging cuts to health care services and saving jobs in the public sector.  The increased FMAP provisions are currently set to expire at the end of 2010, but the Senate bill would extend the funding through the end of the state fiscal year (June 30, 2011).

Congressional Budget Office (CBO) estimates released Tuesday night show the revised bill would pay for itself, even reducing future deficits by $1.37 billion over the next decade.

Initiative 1107 would repeal several common taxes on nonessential items like candy and soda. The measure would also reopen two wasteful business and occupation (B&O) tax loopholes that were closed during the 2010 legislative session.

To help generate additional resources, this year lawmakers narrowed two tax preferences that were expanded by a recent State Supreme Court ruling. In 2005, the Court expanded a preferential B&O tax rate of 0.138 percent, which was originally intended only for processors and wholesalers of perishable meat products (meatpackers).  The Court’s decision allowed companies whose products contain only minimal amounts of meat — i.e. canned chili — to claim this preference. The ruling also expanded a B&O exemption, which originally was intended only for companies that preserve fresh fruits and vegetables, to encompass products with similarly small amounts of preserved fruits or vegetables.1

This year, policymakers clarified and narrowed these preferences to conform to their original intent.  Initiative 1107 would re-expand these preferences at a cost to the state of nearly $9 million in the coming biennium.

For more information on I-1107 read the Budget & Policy Center’s latest policy brief, “2010 Initiatives Could Impact Public Services.”

1. The exemption for canning and preserving fruits and vegetables is scheduled to expire in 2012. Companies that claimed the exemption will then be eligible to receive a preferential, 0.138 percent B&O tax rate.

Initiative 1107 would repeal several common taxes on nonessential items like candy, soda, and bottled water.  Eliminating these essential sources of revenue could jeopardize efforts to maintain and improve public and environmental health, however.

There are significant social costs associated with the growing consumption of candy, soda, and bottled water. Soda and candy have been linked to the rising obesity epidemic in the United States.1  The production of bottled water significantly contributes to global warming while discarded bottles clog streams, rivers, and other natural habitats.2

One of the benefits of taxing unhealthy or environmentally damaging products is that the taxes encourage consumers to make healthier long-term purchasing decisions. In King County, consumption of candy and bottled water could slow by as much as nine percent in the coming years, due to the extension of the sales tax to these products. Purchases of soda, which was subjected to a smaller tax increase, are likely to slow by a smaller degree.3

Revenues from the taxes targeted by I-1107 are deposited into the state’s general fund, which is used to support numerous important programs, including those designed to improve public and environmental health. For example:

• Under the 5930 Program (named after Senate Bill 5930 enacted in 2007) the Department of Health receives about $20 million per biennium in order to develop and implement strategies to reduce obesity and other chronic diseases, increase vaccinations, prevent the spread of communicable diseases like E. coli or Salmonella, and improve public health via other initiatives.4
• The Department of Ecology’s (DOE) Air Quality Program protects public and environmental health by monitoring air quality and regulating pollutants from motor vehicles, manufacturers, agriculture, and other sectors of the economy. Fifty-nine percent (about $19 million this biennium) of the funding for this program comes from the general fund.5
• Fully 83 percent ($32 million this biennium) of the funding for DOE’s Water Quality Program  — which is responsible for preventing and cleaning up water pollution — is provided through state general fund. This program also ensures that the public has access to accurate information about water quality in Washington State.6

All of these programs are vulnerable to being severely cut or eliminated in the coming biennium. Initiative 1107 would further impede the state’s ability to address public and environmental health problems.

For more information on I-1107, read the Budget & Policy Center’s latest policy brief, “2010 Initiatives Could Impact Public Services.”

1. The New England Journal of Medicine, “The Public Health and Economic Benefits of Taxing Sugar-Based Beverages,” September 11, 2009.

2. Eric Sorensen, “Seven Wonders for a Cool Planet: Everyday Things to Help Solve Global Warming,” The Sightline Institute.

3. In King County, the combined state and local sales tax rate is 9.5 percent. The Department of Revenue estimates the price-elasticity of demand for candy, soda, and bottled water to be 0.9, https://fortress.wa.gov/binaryDisplay.aspx?package=27107

4. The Washington State Department of Health, the 5930 program, description available on-line at http://www.doh.wa.gov/PHIP/products/5930/overview.htm.

5. Washington State Department of Ecology, Air Quality Program, description available on-line at: http://www.ecy.wa.gov/air.html.

6. Washington State Department of Ecology, Water Quality Program, description available on-line at http://www.ecy.wa.gov/water.html.

Initiative 1107, a citizen initiative slated to appear on the November 2010 ballot, would repeal the following recent tax increases on nonessential items:

• A temporary extension of the state sales tax to bottled water.
• A permanent extension of the sales tax to purchases of candy and gum.
• A temporary excise tax on soda of two-cents per 12 ounces.

It is important to note that these types of taxes are quite common throughout the United States.  The map below shows that Washington is one of 31 states that apply the state sales tax to purchases of candy. Among these states, 14 also apply the tax to bottled water.  (Five states do not levy a general sales tax.)

In addition to Washington, six other states — Arkansas, Illinois, Rhode Island, Tennessee, Virginia, and West Virginia — levy selective taxes on soft drinks or soda.

The tax increases that would be repealed under I-1107 are part of a larger package of revenue enhancements that was enacted earlier this year.  Without these enhancements, policymakers would have been forced to make unacceptably deep cuts in fundamental public services like health care and education.   By eliminating the taxes listed above (in addition to reopening two wasteful B&O tax loopholes), I-1107 would cost the state some $250-$300 million over the next three years.

For more information on I-1107, read the Budget & Policy Center’s latest policy brief, “2010 Initiatives Could Impact Public Services.”