Out-Dated, Flawed Revenue System Creating Long-Term Fiscal Challenges

Part Two in a Series on Washington's Long-Term Fiscal Challenges

Maintaining Washington’s core health and education investments requires that policymakers adhere to disciplined yet rational budgeting practices. As we wrote last week, it would be counterproductive to impose greater restrictions on the state budget process without giving policymakers access to all of the tools needed to create a sustainable budget – including the ability to address Washington’s flawed revenue system. Without changes to Washington’s outmoded tax system, the state will face years of increasingly dire fiscal challenges.

Regardless of how the current budget stalemate is resolved, Washington will face enormous fiscal problems in the years ahead. The graph below shows that under current law revenues are projected to fall $1.5 billion short of the amount needed to sustain our existing commitments to health care, education, services for the elderly, and other key public systems in the coming 2013-15 budget cycle. Absent major reforms, this gap – often referred to as the “structural deficit” – is projected to grow to $2 billion in the following 2015-17 cycle.

The largest cause of this ongoing fiscal imbalance is a revenue system designed for a 1930’s era economy. While our state economy has changed significantly over the past 80 years, the tax structure has not kept pace with these changes. As a result, Washington’s revenue system has lost significant capacity to generate the resources needed to support our state’s growing need for education, work force development, health care, and other basic economic priorities.

Key reforms that would alleviate this imbalance include: extending sales tax to consumer services, enacting a new tax on capital gains, and integrating spending on narrow tax breaks into the state budget process.

This is the second post in a series on Washington’s long-term fiscal challenges. Don’t change that dial.