The 2016 budget proposal from the Washington State House of Representatives offers a number of solid recommendations for maintaining existing investments and addressing short-term priorities for Washington’s economy. Missing from the budget is a focus on the long-term – and the kinds of common-sense revenue reforms that are necessary for our state to fully fund K-12 schools and reform its flawed tax system.
In addition to making adjustments to compensate for changes in projected costs, the House budget would allocate more than $500 million in new funding toward important priorities. For example:
- Education: ($222 million): The budget partially addresses the K-12 teacher shortage in our state by increasing pay among first-year teachers to $40,000 from $35,000 per year. It would also increase bonuses for teachers that attain professional certifications and help retain pay for custodians, para-educators, and other essential school workers. In higher education, it would add funding to help aspiring students from families with lower incomes go to college. A program that helps communities with low property values raise enough resources to adequately fund local schools also receives a temporary boost of $90.5 million.
- Healthy People ($136 million): To comply with court mandates regarding mental health services in Washington state, some funds would go to improve the quality of patient care and to ensure the safety of staff at state mental hospitals. The budget would also include funding for 25.5 additional registered nurse positions at Western State Hospital. Funding would also be added for four new facilities around the state, each able to serve about 17 patients at a time. Additional funds would be allocated to help patients stay in stable, secure housing while getting treatment or recovering.
- Healthy Environment ($150 million): Like Governor Inslee’s proposed budget in December, the House’s budget would add significant new resources to compensate for 2015’s unusually bad wildfire season and to bolster efforts to prevent similarly devastating fires in the coming years.
- Homelessness mitigation ($45 million): Given the dire circumstances around homelessness in communities throughout Washington state, the House budget provides $37.4 million to help people who are homeless find stable, secure housing. Grants would also be allocated to public schools that find effective ways to help students who are homeless get the assistance they need and to stay in school.
To pay for the teacher salary increases and other K-12 enhancements, House leaders sensibly propose to raise about $120 million per year in additional revenues by closing or narrowing six wasteful tax breaks. They include a Real Estate Excise Tax exemption on properties sold at foreclosure claimed by banks; a sales tax exemption claimed by shoppers from other states; a sales tax exemption on bottled water; and preferential business tax rates claimed by prescription drug wholesalers, international banks, travel agents, and tour operators.
Challenges and Missed Opportunities
While House leaders’ effort to narrow tax breaks is a good start, it still won’t raise enough revenue to provide the funding needed to fund K-12 education as mandated by the State Supreme Court. What’s more, the budget writers miss a big opportunity to reform Washington state’s upside-down tax system – in which the people with the lowest incomes pay a much higher percentage in taxes than the wealthiest 1 percent. The policymakers should have proposed common-sense reforms, including the capital gains tax they championed last year.
Instead, their budget relies on draining budget reserves, transferring resources from other accounts, removing required expenditures from long-term projections, and other one-time actions to compensate for higher-than-anticipated needs for state services and lower-than-expected tax collections.
Furthermore, the House’s proposal to draw $530 million from budget reserves to pay for the wildfires and other pressing needs is risky. Doing so could make it difficult to maintain services that benefit all Washingtonians should the economy take a turn for the worse. By 2019, budget reserves will fall to less than three percent of annual state spending under this plan. That’s far below the 15 percent reserves recommended by most state fiscal experts and economists.
It is commendable that the House budget proposal maintains the investments previously enacted in the 2015-17 state budget and addresses important short-terms priorities that will help improve the well-being of many Washingtonians. But significant reforms to Washington’s tax system will still be needed to create a sustainable state budget that helps ensure our schools and our economy are strong.
State lawmakers should move quickly to approve several new bills introduced this week by members of the House of Representatives to cut back on wasteful corporate tax breaks and to hold Boeing, a major beneficiary of state tax subsidies, accountable for shipping jobs out of state.
As the state legislature struggles to fulfill its state Supreme Court mandate to fund public schools and faces lower-than-expected projections for tax revenues, this effort to scrutinize and weed out costly tax breaks is a fiscally sound move. These proposals would secure at least some new revenue for our schools and our state economy.
When lobbyists secured the largest state corporate tax subsidy in U.S. history for the Boeing Company in 2013, they assured lawmakers and the public that renewing and expanding aerospace tax breaks would allow the company to create many new jobs in Washington state. Since then, however, the company has terminated, or relocated to other states, thousands of Washington-based jobs. Yet Boeing continues to claim millions of dollars in annual state tax subsidies.
To hold Boeing accountable for its use of Washington state tax break dollars, House Bill 2994 would require the company to contribute $2,500 to public K-12 schools for every job terminated or shipped out of state since November 2013. These tax breaks were intended by the legislature to maintain and grow aerospace jobs in Washington state. By actually tying the company’s eligibility for the tax breaks to in-state job creation and investments in the education of future workers, the bill would help ensure Boeing upholds its end of the deal going forward.
The proposals would also repeal or scale back four wasteful tax breaks – including a sales tax exemption claimed by oil refineries (HB 2990); a business tax deduction on income from home mortgages (HB 2991) that is claimed by large multinational banks despite being intended to help small community banks; a business tax exemption claimed by international banks (HB 2993); and a sales tax exemption on large private jets purchased by corporations (HB 2992). Removing these tax breaks would generate an estimated $60 million per year in new tax resources for schools in Washington state.
Washington’s schools should not continue to have outdated textbooks and overcrowded classrooms while multi-million and -billion dollar corporations are claiming tax breaks that don’t benefit the community as intended. These common-sense reforms are a step in the right direction.
Declining Revenue Projections Show It’s Time for Policymakers to Get Serious about Meeting Washington’s Needs
The new forecast of Washington state tax collections makes it clear that lawmakers can no longer assume the growing economy will automatically generate the resources needed to fund court-mandated improvements to schools, mental health, and other important priorities for our state.
The Washington State Economic and Revenue Forecast Council’s projection that state tax resources will be more than $500 million lower than previously forecasted over the next four years means policymakers must get serious about generating new revenue to invest in the progress and well-being of our state and its people.
The diminished tax resources ($78.2 million lower for the current 2015-17 budget cycle; $435.6 million lower in the 2017-19 budget cycle) present a significant challenge to House and Senate budget writers. Their budgets must remain balanced for the remainder of the current budget cycle and in the following two-year cycle.(1)
They should be cautious about tapping budget reserves to make up for the reduction in revenues. Doing so would only be a temporary fix. And depleting savings now could jeopardize the state’s ability to maintain core public investment in schools, public health, parks, and other vital services that serve us all if the economy were to enter a downturn.
Nor should budget writers enact more damaging cuts to the investments that strengthen our communities and our state economy. Cuts to programs that help seniors, families that work hard for low pay, and college students in need of financial aid have already made it harder for too many Washingtonians to make ends meet.
A better approach is to preserve the things we rely on by raising additional resources. The Legislature can do this by ending wasteful tax breaks and enacting the new tax on capital gains as proposed by Gov. Jay Inslee in late 2014. It wouldn’t be right to continue giving tax breaks to large profitable corporations and wealthy investors while cutting back on financial aid, making K-12 class sizes bigger, or eroding the independence of seniors.
Given the forecasted shortfall in resources, these new sources of added revenue are key to ensuring that all Washingtonians have the opportunity to live in healthy, thriving communities.
(1). The four-year balanced budget law allows policymakers to assume annual revenue growth of at least 4.5 percent, even during years in which growth is projected to be lower than that amount. This provision allows lawmakers to call their budget balanced even when sizable shortfalls are projected.
New evidence finds that supporting "home-grown" startups and young, fast-growing in-state companies is likely to be a more effective strategy for states to create jobs and build a strong economy than attempts to lure businesses from elsewhere.
In "State Job Creation Strategies Often Off Base," a new report from the Center on Budget and Policy Priorities, Senior Fellow Michael Mazerov and Director of State Fiscal Research Michael Leachman conduct new research showing that the vast majority of jobs are created by businesses that start up or are already present in a state. They conclude that "many state policymakers pursue economic development strategies that are bound to fail because they ignore these fundamental realities about job creation." When states pursue tax breaks, they divert resources needed to help home-grown startups and young, fast-growing companies deliver maximum job growth and to build a climate that supports their growth.
In the past, a lack of useful data severely limited research about which kinds of firms create jobs. Now, though, the federal government has developed databases that track over time the job-creation record of specific businesses of various sizes and ages while accounting for ownership changes. The U.S. Census Bureau has developed two such "longitudinal" databases. The U.S. Labor Department has developed one as well, and a private company using the Dun & Bradstreet business registry has created yet another.
Research using the improved data has revolutionized our understanding of which businesses create jobs, and where they create them – calling into serious question the value of the various tax breaks states offer businesses to move. Among the facts that counter tax-cut strategies:
- About 87 percent of 1995-2013 private-sector job creation in the median state was home grown. It came from startups, the expansion of employment at existing establishments, and the creation of new in-state locations by businesses already headquartered in the state.
- Jobs that move into one state from another typically represent only 1 to 4 percent of total job creation each year.
- To promote and assist job-generating entrepreneurship, state policymakers would be wise to invest in schools and colleges, improving workers’ skills, and maintaining communities that are attractive to residents who want to start a business. Successful entrepreneurs report these factors were key to where they founded their companies.
- The most commonly cited reason among entrepreneurs for starting their companies where they did was that it was where they lived at the time; 80 percent of them had lived for at least two years in the city where they started their companies.
Now that Tim Eyman’s harmful Initiative 1366 has been struck down by the King County Superior Court for violating the state constitution, lawmakers should put this damaging distraction behind them and focus on improving schools and ensuring that all Washingtonians have opportunities to thrive.
Judge William Downing found that I-1366 – a law designed to force lawmakers into amending the state constitution to require a two-thirds “supermajority” legislative vote or a vote of the people to enact a tax increase of any size – violates the state constitution in multiple ways. His ruling invalidates the law, which voters passed by a narrow margin in a November 2015 election that had an especially low turnout (only 38 percent of registered voters cast ballots), in its entirety. As such, he spared lawmakers from having to grapple with the toxic choice it foisted upon them.
Eyman has indicated that he will appeal the ruling to the State Supreme Court. However, Judge Downing found the measure to be invalid on all three counts put forward by the plaintiffs – illegally strong-arming the people’s representatives into amending the state constitution under threat of an enormous reduction in revenues; putting multiple, unrelated subjects in the initiative; and binding the hands of future legislatures. Such a thorough repudiation means it’s highly unlikely that the Supreme Court will bring the measure back to life.
That’s good news for Washington state. The supermajority amendment included in I-1366 would have given all power over state tax and investment policies to a small minority of lawmakers and corporate lobbyists opposed to important investments in schools, public safety, and other building blocks of a thriving economy. What’s more, if lawmakers had failed to muster the two-thirds vote required to pass the constitutional amendment required under I-1366, the state sales tax rate would have automatically fallen to 5.5 percent from 6.5 percent in April. That would have drained $1.4 billion annually from vital state revenues that support our economy and people. In short, I-1366 would have made it virtually impossible for lawmakers to come up with the billions of additional dollars required by the Supreme Court in the McCleary decision to improve Washington’s schools.
As Judge Downing wrote:
The court's ruling makes it abundantly clear that I-1366 is unconstitutional. The measure has been thoroughly invalidated, meaning lawmakers need not waste any more time on preparing to implement it. Instead, they should focus on building a state revenue system capable of amply funding good schools and other investments that will help kids, families, workers, and seniors succeed in the 21st century economy.
For more analysis on what the I-1366 decision means for our state budget and the legislature, save the date for our Budget Beat webinar on Friday, January 29, at 11 a.m. It will feature Budget & Policy Center Associate Director of Fiscal Policy Andy Nicholas and Pacifica Law Group Partner Kymberly Evanson – who represented the plaintiffs on both the pre- and the post-election challenges against I-1366.
In order to live up to the promise of a brighter future for our state, we need public policies that create opportunities for all communities to succeed. However, the policies and programs that lawmakers enact often run the risk of creating barriers to success – particularly for people of color and people with low incomes. Racial equity assessment tools, like the ones proposed in House Bill 2076 and Substitute Senate Bill 5752, should be incorporated into the legislative process. These assessment tools help lawmakers better understand the real impacts of their proposed policies by highlighting how they either promote opportunity by advancing racial equity or reinforce barriers by perpetuating institutional racism.
Below is a summary of HB 2076 and SB 5752:
- Both bills would require key government agencies to develop a procedure for implementing racial impact statements for resolutions and legislative bills. These statements would be intended to demonstrate how a given policy would impact a range of potential outcomes -- from economic security to community safety to environmental health -- in communities of color.
- HB 2076 is stronger than SB 5752 by requiring that agencies actually complete a racial impact statement for a bill or resolution at the request of any legislator. Producing such statements would be an important, measurable step toward fixing a system that, in too many cases, has contributed to keeping Washington state’s people and communities from reaching their full potential.
Both bills could be strengthened even more by requiring racial impact statements be completed for all bills affecting health and human service caseloads. Because to make meaningful change, policymakers must institutionalize practices that seek to undo racism.
As legislators consider the implementation of racial equity assessments in our state, they don’t have to look far for inspiration. Several states across the nation, including Oregon, have successfully instituted racial equity impact statements for various forms of legislation. In addition, King County has an Equity Impact Review Tool and the City of Seattle has a Racial Equity Toolkit, both of which have led to important changes in how policies are drafted. HB 2076 and SB 5752 are a great start toward ensuring these types of efforts are happening statewide in Washington.
We all want to build a better future for our families and our state, but to fulfill that promise we must change the way we do our work. Racial equity impact statements are an important tool in the larger efforts to ensure that all members of our communities have access to the building blocks of a strong economy. And they also will help to undo the systemic inequities that have all too often played a role in keeping communities of color and people with low incomes on unstable and unequal footing.
Learn more about various racial equity impact assessment tools and see local examples, including the tool we developed with our Washington KIDS COUNT partners at Children’s Alliance, here. Racial equity impact assessments were also a key topic at our Budget Matter Summit this year. If you missed it, check out this video of the summit panel.
The research is clear – when children grow up in poverty, it has long-term consequences for their future well-being, as well as that of the state. With nearly one of every three children in Washington state living in families at risk of not meeting basic needs, poverty poses a significant threat to future generations, as well as to the contributions they can make to our communities and economy.
Lawmakers can help improve the well-being of children by passing House Bill 2518, which supports a two-generation approach to family economic security (see graphic) – so that both parents and their children have the opportunity to get ahead.
Nationally, two-generation approaches – those that focus on economic success of whole families, as opposed to a focus on children or adults in silos – are gaining momentum. HB 2518 joins these national efforts by creating a results-focused, evidence-based state effort to improve child and family well-being in our state by:
- Directing state agencies across sectors – early learning, health and human services, and higher education – to create a data system to track intergenerational poverty each year;
- Creating a state commission to summarize the data in an annual report; and
- Creating a community advisory committee – made up of advocates, faith-based leaders, government representatives, and academic experts – to provide input on the data and on the creation of a long-term plan to improve intergenerational family economic security.
It is noteworthy that this legislation rightly puts a focus on results and aims to create a commission that has the power to act. We further encourage lawmakers to strengthen this bill by developing explicit goals to achieve equity for children and families of color. We also recommend that policymakers include families with low incomes in a decision-making capacity with the commission. With these additions, HB 2518 would be a strong first step at laying a foundation to create economic security for future generations of Washingtonians.
In November, the Budget & Policy Center highlighted the need for a two-generation approach to reduce child poverty in Washington state. Listen to the audio of the presentation given by the Center’s Research & Policy Director, Lori Pfingst.