As House and Senate budget writers come together to pass a final 2016 supplemental budget, they must recognize that additional revenue is essential to investing in a strong economy that serves us all.
While the House budget smartly recommends new sources of revenue, it nevertheless balances its budget in part by drawing down reserves and taking other one-time actions. The Senate budget leaves reserves intact, but it does not include any new sources of revenue. Instead, Senate leaders patch together a nominally balanced budget through one-time gimmicks – including raiding other accounts and eliminating unused funds that will be needed in the future. Such one-time actions and gimmicks are not sustainable and will not strengthen our state economy in the long run.
Ultimately, the House budget bolsters investments in the kinds of public priorities that boost the economy – such as schools, public health, and community development – while the Senate's budget by and large weakens them. [See graph for more details.] And both budgets are still too focused on short-term needs.
click on graph for a larger version.
Leaders in the House take steps to strengthen Washington’s K-12 schools as well as its community colleges and universities by increasing investments by about $227 million.
The House budget includes:
- Funding to address the teacher retention crisis. Increasing pay among first-year teachers to an average of $40,000 annually from $35,000 would help Washington attract and retain high-quality teachers. Funds would also be allocated to address the faculty shortage at community colleges and public universities. Much of this investment would sensibly be paid for by eliminating six wasteful corporate tax breaks.
- A focus on addressing the opportunity gap. By expanding investments in the efforts to ensure that students of color receive equitable disciplinary treatment at school, the House takes a small but meaningful step to advance racial equity.
- Directing Supreme Court-imposed fines to schools. The House budget provides funds to pay the fines the State Supreme Court levied against the legislature for failing to develop a plan to fund schools as required by the McCleary decision. About $21 million is provided to K-12 education to account for these fines.
By contrast, Senate leaders take no steps to acknowledge the Supreme Court's fines or to invest in K-12 education. Overall, they propose to reduce public education spending by $26 million and redirect funds from elsewhere in the budget to fund charter schools.
The Senate budget includes:
- A reallocation of the unspent K-3 class-size reduction funds. The Senate “saves money” in its education budget by reallocating the $62 million in funds intended to help our overcrowded classrooms in kindergarten through third grade. This move partially unfunds multiple laws requiring the state to reduce class sizes, and it removes funding that will likely be needed by school districts in the coming months.
- Increased funding for universities. With the exception of The Evergreen State College, which would see a modest reduction, funding for public universities would be slightly increased.
- Reinstated funding for charter schools. Some $21 million in funding for public charter schools would be moved from elsewhere in the budget. This enables the Senate to fund charter schools while still addressing a recent State Supreme Court ruling requiring the legislature to change the way these schools are financed.
The House increases investments in programs that serve the physical and mental health of Washingtonians by $90 million.
The House budget includes:
- New investments in mental health. An additional $14.4 million in funding is provided for more beds at crisis centers around the state and other mental health services.
- More assistance for runaway youth. To assist homeless youth who have run away from home because of ongoing family problems, $2 million is provided.
Leaders in the Senate propose to reduce funding for investments in the health of Washington’s people by $26 million.
The Senate budget includes:
- Redirected investments in mental health. Although overall funding for mental health would be reduced in the Senate budget, new funding would be allocated for mental health hospitals and several other mental health services.
- The implementation of a fee-for-service model of health care for people who are elderly, blind, or disabled. The Senate assumes $26 million in savings can be achieved by transitioning health care funding for these populations to a fee-based model from the current managed-care model.
- The drawdown of public agency reserve funds. Some local mental health service organizations have accumulated reserve funds (that are separate from the state's rainy day fund), which could be drawn from in the event of an emergency. The Senate budget draws down these savings by $44 million to maintain or expand other investments.
Under the House budget proposal, overall funding for investments in the economic security of Washington’s kids and families would be increased by $36 million. But the budget does keep in place restrictions in access to a program that helps families struggling to make ends meet.
The House budget includes:
- Salary increases for early learning teachers. To fund previously negotiated salary increases for early learning professionals that serve families with lower incomes, an additional $12.7 million would be allocated.
- Maintained restrictions for access to Temporary Assistance for Needy Families (TANF) funds. Because of harsh restrictions to the TANF program enacted during the recession, the use of TANF's crucial services has been lower than projected, and thousands of families have been unable to access these services. The House budget would keep those restrictions in place and reallocate $21 million in unspent funding.
The Senate budget proposal would reduce funding for investments in economic security by $57 million.
The Senate budget includes:
- Maintained restrictions in TANF funds. Like the House, the Senate would reallocate unspent TANF funds, but to a larger degree – $33 million for the remainder of this budget cycle.
- A replacement of ongoing unemployment funds with a one-time source of funding. About $17 million in general funds for unemployment services would be cut and replaced via a one-time sweep of funds from a separate account. Replacing an ongoing source of funds with a temporary one could jeopardize policymakers’ ability to maintain these critical services in the long run.
Community Development & Trust
Leaders in the House would increase investments in building stronger, safer communities by $318 million. They would do this in part by dipping into the state Budget Stabilization Account or “rainy day fund.”
The House budget includes:
- New investments to address youth homelessness. Additional funding will go toward a range of services for homeless youth – from helping them succeed in school to creating additional beds at shelters.
- Additional investments to address wildfires. To help address the costs associated with 2015’s unusually bad fire season, $190 million in funds would be allocated from the state rainy day fund.
Although it does address a few short-term needs, the Senate would overall reduce funding in community development by $174 million.
The Senate budget includes:
- A shift in funds to pay for the supervision of offenders. A little over $6 million in funds would be removed from other accounts to pay for higher costs within the Department of Corrections to supervise some offenders.
- Funding to address wildfires. The Senate budget would move $156 million from elsewhere in the budget to help the Department of Natural Resources pay for the costs associated with last summer’s wildfires.
Even in a supplemental budget year, legislators have the opportunity to propose a budget that takes the long view. Unfortunately, these budgets merely scrape by in the short-term, relying on fiscal gimmicks that put our state economy at risk.
To create a more sustainable budget, policymakers should at the very least increase revenue by eliminating wasteful corporate tax breaks, as the House suggests. They should also consider other new forms of revenue, like the capital gains tax. Without considering such revenue reforms, legislators are missing an opportunity to invest in the future progress of all Washingtonians.
The supplemental budget proposed by the Washington State Senate takes the wrong approach to meeting the needs of Washingtonians. By offering no new forms revenue and by cutting funding for important state programs, the Senate budget writers don’t offer meaningful solutions to strengthening our state economy.
The budget puts corporations’ needs over the needs of everyday Washingtonians. In particular, it keeps in place wasteful corporate tax breaks that the House wisely recommended cutting in its budget. Instead, the Senate balances its budget by cutting funds from government programs, such as toxic clean-up programs that improve the health of communities throughout the state. It also fails to increase access to high-quality early learning opportunities for kids, per the Early Start Act.
During a time when our Legislature continues to be fined $100,000 a day by the State Supreme Court for failing to take steps to fully fund K-12 education, the Senate’s budget also doesn’t offer any recommendations for investing in schools.
While it’s worth noting that the Senate budget sensibly refrains from tapping into the Rainy Day Fund to balance its budget, Senate budget writers would nevertheless be wise to implement the common-sense revenue proposals put forward by Gov. Inslee and by their colleagues in the House. Doing so would better set the Legislature up to meet its K-12 funding mandate and to preserve state programs that benefit us all.
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.