With one week to go in the regular session, the House and Senate must resolve a roughly $140 million difference between their Supplemental 2013-2015 budgets. The House budget invests more in education, which accounts for the majority of the difference with the Senate budget. The House investment in education is critical, as it will put the state on a better path to fully fund education by 2018.
The 2014 Supplemental Budget is intended to make adjustments and corrections to the two-year spending plan that was adopted last year. It should account for changes in caseloads and costs, as well as legal settlements and directives from the Court. An order issued by the State Supreme Court in January advised the legislature to make further progress on basic education funding in the 2014 Supplemental Budget. How the House and Senate budget proposals compare on those investments, as well as other important areas of state spending, are highlighted below.
Education & Opportunity
The House budget proposes to increase spending in Education & Opportunity by almost 80 percent more than the Senate (see graph). The bulk of this gap includes funding to restore teacher salaries ($55 million) and invest more in classroom materials and supplies ($20 million more than Senate). Both of these investments align with the Court’s requirement that the legislature take immediate action to increase education funding. Additionally, the House spends $13.5 million for improvements to early education (see chart below). These enhancements are absent in the Senate budget.
Compared to the original 2013-15 budget, both House and Senate supplemental proposals reduce investments that provide Economic Security for Washingtonians. While funding is reduced for these services in both budgets, the Senate reductions are about 65 percent ($37 million) deeper than the House. Reductions in services that help people find and keep a job, known as Temporary Assistance to Needy Families (TANF), account for the majority of funding reductions. Both budgets bank on savings from reduced participation in the TANF program. While that may sound like good news, declines in TANF participation are not a sign of success, but rather a result of policy choices that have severely limited access to the program. On top of those assumed savings ($63 million), the Senate further reduces support for struggling families by making an additional $27 million cut to the ongoing funding for the TANF program.
Healthy People & Environment
As the graph below shows, both budgets invest more than the original biennial budget in Healthy People and Environment. Investments that provide care for seniors and vulnerable populations; ensure struggling workers and families have access to health care; and keep our environment healthy, safe, and clear for future generations are increased. Notably, funding increases for mental health are one of the largest areas of additional investment in both the House and Senate budget proposals. A portion of that investment will go towards meeting the conditions of a recent court settlement to provide intensive mental health services for children with high needs.
Legislative leaders have a significant gap to bridge in order to come to agreement on a final budget. The House’s budget, combined with their proposal to increase revenues by closing outdated tax breaks, would put the state in a much better position to meet the 2018 deadline of investing an additional $4.5 billion in basic education. But make no mistake, additional revenue will be needed in the next biennium, as the state will fall at least $2 billion short of what it needs to make the next installment in K-12 education.
Yesterday, the House chose to add additional investments in education and early learning to their budget proposal. Now, the Senate and House budgets are far apart in their approach to meeting court-ordered requirements to fully fund education.
Under the House proposal, teachers would get a cost of living adjustment (COLA) for the first time in six years. Restoring teacher COLAs marks a significant step towards complying with the State Supreme Court’s mandate that the legislature fully fund basic education by 2018. The Court’s recent order, made clear that teacher and staff salaries have been underfunded by the state.
The House budget also adds $13 million to improve childhood early learning by increasing payments to providers for quality care and ensuring the stability of child care for lower income working parents (based on provisions in House Bill 2377).
Neither investment is included in the Senate’s budget. But that’s not the only difference in education funding between the two proposals. Below is a chart that details some of the areas where the two chambers differ.
With just over a week left in the regularly scheduled legislative session, the House and Senate will need to find resolution on a final spending plan for the remainder of the current 2013-15 budget, which ends on June 30th, 2015. They must do so with an eye towards the 2018 deadline to fully fund basic education. Additional investments in education must begin now, and the House funding boosts are a great place to start.
Senate leaders passed a budget that pencils out with the help of fiscal gimmickry and nontransparent budgetary sleights of hand. The budget is neither sustainable nor responsible, given the mandate from the State Supreme Court to devote an additional $4.5 billion to schools in Washington state by 2018. The Senate’s budget violates basic principles of public finance such as transparency, honesty, and accuracy.
Neglecting Mandatory Costs
Every year, the cost to maintain the same level of services in the state budget must be adjusted to account for growth in the state’s population, changing demographics, rising or falling caseloads, and other inflationary costs. A primary function of supplemental budgets is to account for these spending adjustments, referred to as “maintenance level” changes.
The basic purpose of the state government is to provide a consistent level of education, health care, transportation services, and other investments. The maintenance level concept is a good public finance tool that provides an accurate and honest look at the true costs to maintain state services. In explaining the importance of a maintenance level budget, the Center on Budget and Policy Priorities explains that, “Before debate begins on a spending plan for the upcoming fiscal year, policymakers should know what the state’s basic fiscal situation is.” (1)
Yet the Senate budget ignores maintenance increases in several instances, masking about $50 million in cuts to important public services in the coming fiscal year that ends in June 2015.
The largest maintenance costs that the Senate leaves unfunded include (see graph):
- Worker’s Compensation funding to cover medical treatment and compensation to workers who are injured on the job and self-Insurance premiums to cover injuries and damages to a third party (underfunded by $11 million).
- General Government Central Services funding which pays for basics like printing, mail, contracting, and building maintenance (underfunded by $5 million).
- Assistance to help families find and keep a job, known as Temporary Assistance to Needy Families (TANF) (underfunded by $27 million).
Both the House and Senate proposals assume that agencies will not spend all of the resources devoted to them in the original 2013-15 state budget. These so-called “reversions” are projected to total $140 million at the end of the current budget cycle and are counted as a savings in both the House and Senate budget proposals. Despite multiple rounds of staff cuts, administrative efficiencies, and billions of dollars in program cuts over the last few years, it is questionable if these savings assumptions are realistic.
But the Senate takes this even further by assuming an additional $8.4 million in savings through “under-expenditures” or agency efficiencies.
Failing to account for ordinary cost pressures and over-assuming cost savings are actions that put the squeeze on the state’s ability to deliver legally-required services. If agencies are unable to stretch their dollars according to the Senate’s budget, the result will be either real cuts to programs that serve Washingtonians, or a reduction to modest savings that will be needed to maintain essential services when the next recession strikes. Either way, the Senate budget creates more problems than it solves.
1. McNichol, Elizabeth "Budgeting for the Future: Fiscal Planning Tools Can Show the Way" Center on Budget and Policy Priorities, February 2014
Despite a looming deadline from the State Supreme Court to invest an additional $4.5 billion per two-year budget cycle in Washington state schools by 2018, last week the Senate put forward a supplemental budget plan that included 18 costly new or extended tax breaks.
Although these tax breaks are projected to have a relatively small, $10.3 million impact on the current 2013-15 state budget, if enacted, their costs would balloon to nearly $120 million by the 2017-19 budget cycle (see table).1.
By contrast, similar to a plan put forward earlier this year by Governor Inslee, House leaders proposed to eliminate several wasteful tax breaks and take other actions that would generate more than $280 million by the 2017-19 budget cycle for basic education reforms (see table).
The bottom line is that the Senate’s plan to enact a raft of new tax breaks now is short-sighted, irresponsible, and will only make it more difficult for future policymakers to fully fund basic education and other important investments.
Senate Proposed Tax Actions
The tax actions proposed by the Senate with the largest negative impact in the 2017-19 budget cycle include:
- Extending a tax break for “server farms” (-$50 million);
- Extending and modifying tax breaks for high-tech companies (-$39 million); and
- Enacting new tax and fee breaks for certain liquor retailers (-$11 million).
House Proposed Tax Actions
Tax actions proposed by the House with the largest positive impact during the 2017-19 budget cycle include:
- Extending the Other Tobacco Products Tax to “e-cigarettes” ($77 million);
- Changing a sales tax break for Oregonians to a rebate program ($70 million);
- Eliminating a tax break for oil refineries ($55 million);
- Eliminating a sales tax break on bottled water ($48 million); and
- Eliminating a tax break for prescription drug wholesalers ($39 million).
Stay tuned to schmudget. We’ll have more details on tax actions proposed in 2014 over the next few days.
1.Technical note: this analysis examines only proposed tax actions, or changes in tax law that would alter the amount owed by a taxpayer(s) in future years compared to the current year. It does not include other revenue changing actions, such as diverting revenue streams, or so-called “budget driven revenue” measures.
Now that we know nine major corporations with operations in Washington state paid zero or less in federal corporate income taxes in recent years despite reaping huge profits, serious questions arise as to whether these corporations or others are dodging Washington state taxes too.
Washingtonians could get answers if the Senate acts to approve HB 2201, a measure that would significantly improve tax break transparency and corporate accountability. Although this measure was approved by the House on February 18, it hasn’t even been scheduled for a public hearing in the Senate.
The federal tax information comes from a new report, released by the Institute on Taxation and Economic Policy and Citizens for Tax Justice. It found that 111 large corporations in the U.S. paid no federal corporate income taxes in at least one year between 2008 and 2012. Many of them actually received sizable tax refunds during the years in which they paid no taxes, despite making enormous profits.
At least nine of the 111 corporate tax dodgers have activities in Washington state (see table). They are Boeing, CenturyLink, Domtar, Facebook, H.J. Heinz, Honeywell International, Paccar, Praxair, and Yahoo. Highlights from the report include:
- Boeing – the recent recipient of the largest state tax subsidy in US history – paid no federal corporate income taxes in all five years examined in the study. The company received $822 million in refunds despite nearly $15 billion in profits during this period.
- Paccar, a multinational technology company based in Washington state, paid no taxes in three of the four years examined, while making $775 million in profits.
- Honeywell International received refunds amounting to $510 million over two profitable years.
Is it happening here?
Are these corporations avoiding Washington state taxes too? It is impossible to know because almost all company-specific tax information is confidential under state law.
The limited information that is publicly available reveals that six of the nine federal corporate tax dodgers identified in the report have also claimed tax breaks in Washington state recently (see table). For example, Yahoo, which paid no federal corporate income taxes in one of the years examined in the study, got $252,000 from claiming a wasteful Washington state tax break for research and development activities.
Yahoo and the other companies listed in the table might be claiming many more state tax breaks or engaging in other tax avoidance strategies in Washington state. But without reforms lawmakers and the public will remain in the dark about whether corporations are adequately supporting the health, education, public safety, and other investments that benefit their workers and shareholders.
Corporate transparency reforms needed
House Bill 2201 would shed much-needed light on individual corporations’ tax payments in Washington state. Among other things (detailed here and here), the measure would require all large, publicly-traded corporations operating in Washington state that claim more than $10,000 per year in state tax breaks to disclose information about their state business and occupation (B&O) tax payments, including:
- All income generated in Washington state subject to the B&O tax;
- The amounts claimed in preferential B&O tax rates, tax credits, and certain other tax breaks; and
- Bottom-line tax payments.
Approval of HB 2201 would provide lawmakers and the public with basic information essential for more reasoned decisions about tax and spending policies in the years ahead.
Similar to the Senate Majority Coalition Caucus (MCC), the proposed 2014 Supplemental Budget unveiled by the House today would make only minor changes to spending for the remainder of the current biennium which ends on June 30, 2015. Unlike the Senate MCC, the House also released an education funding plan (House Bills 2792 and 2796) accompanying the budget that would raise additional revenue by closing tax breaks and lay out a plan to put the state on track to entirely fund basic education reforms by 2018, as required by the McCleary decision.
In addition to addressing changes to caseloads and other fluctuations, the House budget directs $82 million in other investments, including $60 million for textbooks and supplies in classrooms (the Senate invested $38 million) and leaves a positive ending fund balance of $272 million.
The House budget commits the same folly of shortsightedness as the Senate budget, setting up large shortfalls in the next biennium due to requirements to fully fund education. The House slightly redeems itself by offering a separate proposal contained in two bills to raise modest revenue and phase-in full funding for schools:
- House Bill 2796 would immediately raise $100 million for schools by closing four outdated tax breaks. The tax break closures mirror the plan proposed yesterday by Senate Democrats.
- To ensure the state meets the 2018 deadline to fully fund basic education, House Bill 2792 codifies a phased-in funding plan for education reforms and incrementally raises teacher and school staff salaries until they reach the market rate. The bill also establishes a task force to address local funding for schools.
Taken together, these proposals take swift action to generate more money for schools and provide a blueprint for implementing the necessary funding for our children’s education. The effort acknowledges that funding education cannot be achieved without additional revenue. Closing four tax breaks is an earnest start, but much more will need to be done to raise the resources to make the needed $4 to $5 billion ongoing investment in basic education. As the graphic shows, lawmakers face an uphill journey to meet that demand.
By Elena Hernandez -- Today Governor Inslee will sign the Washington State Dream Act into law- an important step towards increasing access to higher education for all Washingtonians.
Under the Dream Act, undocumented youth (Dreamers) that graduate from Washington state high schools will qualify for the State Need Grant – our state’s need-based grant aid program. Washington state becomes only the fourth state in the nation to implement such a law, and it is an important step in ensuring that our state has the highly skilled workforce needed to compete in today’s economy.
Our recent policy brief, The Washington State Dream Act: An Investment for all Washingtonians, finds that everyone in our state benefits when higher education is more attainable. Highlights include:
Increased Earnings. Higher education helps ensure that Washingtonians can meet their basic needs and achieve long-term economic security:
• People who receive a bachelor’s degree earn $840,000 more over their working life than people with only a high school diploma. An associate’s degree yields $300,000 more.
Positive Return to Communities. For Dreamers that receive the State Need Grant the return to the state would far outweigh the costs:
• Every $1 invested in Dreamers who graduate from a four-year university would produce a $2 increase in state and local tax dollars; graduating from community and technical college would produce a $4 increase.
• Over time, the net return on this investment for the state could be as much as $43,000 per graduate at a four-year university and $22,000 per graduate at a community and technical college.
Addressing the Opportunity Gap. Dreamers are less likely to graduate from high school than their peers, and even amongst those that do graduate, only half (49 percent) of them pursue higher education. Improved access to financial aid not only provides incentive for high school completion, it also improves college enrollment and persistence.
Read the full brief here. You can also learn more about the legislative history of the Washington State Dream Act and get an in-depth look at our analysis by watching our webinar here, co-hosted with Rich Stolz, Director of OneAmerica.