The state budget is intended to be a tool that provides people and communities with the opportunity to thrive. It should include ample funding for critical services like schools, child care, and programs that help people cover their basics when they face hard times. When there is a budget shortfall, lawmakers must find ways to boost funding. Making large-scale cuts and dipping into the Rainy Day Fund are not solutions. Unfortunately, Governor Ferguson’s proposed supplemental budget relies predominantly on significant cuts to critical public services, unsustainable budget fund transfers, and use of the Budget Stabilization Account (or Rainy Day Fund) to address our state’s $2.3 billion budget shortfall.
After lawmakers made over $7 billion in cuts in the 2025 legislative session to address a revenue shortfall, proposing an additional $800 million in cuts this year (with many targeting the same programs already cut last year) is short-sighted and fails to recognize the urgency needed to enact new and near-term progressive revenue-raising tools. The root cause of our state’s consistent budget shortfalls continues to be our upside-down tax code that over-relies on low- and middle-income households and doesn’t ensure the ultra-wealthy and corporations pay what they owe.
It’s exciting that Gov. Ferguson supported the concept of a Millionaires Tax when he announced his supplemental budget. Such a policy has the potential to make significant and fundamental progress toward a sustainable, progressive tax code in the future. It is the kind of bold thinking we need in our state. However, given that the Millionaires Tax will not realize revenues for the state budget until 2029, more immediate solutions are also needed.
The cuts and budget changes that Gov. Ferguson lays out in his 2026 supplemental budget proposal are not the way to address our budget shortfall. Instead, they are a recipe for unnecessary harm to people throughout our state.
Note: In this blog, we focus on the state operating budget, specifically the Near General Fund – Outlook (NGF-O). The NGF-O is the fund that is subject to the quarterly revenue forecasts and balanced budget requirement and is the number most commonly referred to when talking about the state operating budget.
Why is there a budget shortfall again?
After facing a $16 billion four-year budget shortfall in 2025, lawmakers are once again facing a shortfall. This time, it’s more than $2 billion over the next two years. There are several factors putting pressure on the budget:
- The amount of people who need state services is increasing due to an ongoing affordability crisis. Recent forecasts show that more people are needing and using state-funded public services than previously anticipated – particularly for services like affordable child care, K-12 special education, college financial aid, long-term care, and direct cash and other income assistance.
- Inflation and other economic factors mean the cost of running state agencies and programs continues to increase. Coupled with increased caseloads, this puts additional pressure on the current budget just to maintain the current level of programs and services.
- Harmful federal actions result in increased costs to the state. H.R. 1, the federal reconciliation bill that Congress passed this summer, made large cuts to vital programs like the Supplemental Nutrition Assistance Program (SNAP) and Medicaid, particularly for refugee, asylee, and other immigrant communities. In addition to losing key federal supports, our state now also has to shoulder additional administrative costs. That’s to say nothing of the unnecessary new administrative roadblocks and work requirements that will take more state resources to implement.
- State revenue forecasts continue to show over-reliance on an unsustainable and upside-down tax code. Since last year’s legislative session, projected revenue forecasts have decreased by around $400 million. Washington relies on sales tax collections for approximately half of its revenue despite these collections revealing a long-term trend of declining revenues. As more people face unemployment and more people have lower disposable incomes, they have less money to spend in their local economies. Increased tariffs coming from the Trump administration are also impacting revenue forecasts.
- State agencies need more resources to maintain critical services. Every September, agencies make budget requests to help administer critical budget items, which resulted in over $1.3 billion in agency requests for 2026. Governor Ferguson proposes fulfilling less than half that amount in his proposed budget.
What the governor is proposing to close the shortfall
Rather than enacting near-term progressive revenue solutions like a wealth tax or the Well Washington Fund (a payroll tax on employers of high earners) to balance the budget, Governor Ferguson proposes large-scale cuts, budget manipulation, and use of the Rainy Day Fund:
Cuts to child care, schools, and health and human services
This table outlines just some of the devastating cuts the governor proposed for this session.
Governor's 2026 Supplemental Budget Cuts
| Early Learning and Child Care The governor’s proposed supplemental budget would target early learning and child care for the largest cuts, even though these cuts likely cost the state more than they “save.” Of note, last session, the governor and legislature also focused the lion’s share of cuts on early learning and child care (to the tune of over $1 billion in cuts). So this proposed budget now adds significant additional hardship to a system that is critical to the well-being of families and children. |
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| $217 million | Soft cap on Working Connections Child Care (WCCC) program of 33,000 households with certain exceptions. WCCC currently provides subsidized child care for around 38,000 low-income households. (This builds on $750 million in WCCC cuts from last session.) |
| $41 million | Removal of the scheduled increase in subsidy rates paid to child-care centers that were set in the 2021 Fair Start for Kids Act. |
| $19 million | Reduction of more than 1,800 slots – 25% of the current slots – for the Transition to Kindergarten program, which has been successful in closing opportunity gaps for children starting kindergarten. |
| K-12 Public Schools and Higher Education The Washington state government has a constitutional duty to amply fund public education – a commitment that has not been fully reflected in previous budgets and that would be further jeopardized by additional cuts. |
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| $50 million | A 3% across-the-board cut for the University of Washington and Washington State University, and 1.5% cuts for other four-year institutions and community and technical colleges. (This builds on 1.5% across-the-board cuts for all institutions from last session.) |
| $25 million | Removal of the scheduled increase in payments to school districts that receive Local Effort Assistance (LEA) payments – from $150 per student to $250 per student. LEA payments support school districts in areas with low property values and high property tax rates. |
| $21 million | Reduction of annual payments to school districts to replace aging school buses. |
| $14 million | Reduction of Running Start credit enrollment cap per student from 1.4 to 1.2 full-time equivalency credits, meaning that 11th and 12th graders in the program will lose tuition funding for around 10 college credits per school year. |
| Health Care and Human Services Given that the greatest harm from the federal H.R. 1 bill is to health care and human services programs that support many BIPOC people, older people, people with disabilities, and immigrants, making state cuts to these programs adds insult to injury, and does not align with our state’s values of equity and inclusion. |
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| $70 million | Delay in Medicaid reimbursement rate increase for assisted living and skilled nursing homes, creating a gap of around $13 per hour between reimbursement rates and actual staff wages. |
| $60 million | Reduction in funding and enrollment for Washington state’s Apple Health Expansion, which provides access to health care regardless of citizenship status (and currently covers 13,000 immigrants). |
| $32 million | Reduction in expanded public health programs, such as the Birth Equity Project (which funds organizations to improve birth outcomes in Black, African immigrant, and American Indian/Alaska Native communities) and Nurse Preceptor Grant Program (which helps reduce the nursing workforce shortage). |
Additionally, the cuts reflected in the governor’s proposed budget don’t tell the full story. Changes that are not technically budget cuts, but that effectively have the same impact of cuts, include federal cuts that are would not be fully backfilled by the state, as well as critical budget requests by agencies that are denied. For example, while the governor’s budget provides $18 million to cover H.R. 1 cuts to Medicaid long-term care for refugees, asylees, and other immigrants, this funding would only cover 500 out of the 3,000 estimated individuals who will lose their eligibility. As another example, the Department of Commerce requested $21 million this year for crime victim services funding, which they describe as “the minimum needed to maintain Washington’s current victim services infrastructure.” The governor includes only $12 million of the $21 million requested in the budget.
Budget gimmicks that don’t address the root problem
The governor is proposing to re-direct $569 million from the Climate Commitment Act (CCA) to cover all of the funding for the Working Families Tax Credit (WFTC). This effectively takes money from the Climate Commitment Act to fund a program that is already covered by the budget’s general fund. This kind of gimmick pits tax credits for lower income communities against environmental justice programs, instead of fully funding both.
The governor’s budget also relies on using $1 billion from the Rainy Day Fund, which represents half of the account’s total current funds. While it’s critical to minimize cuts to the budget as much as possible, use of the Rainy Day Fund must be a last resort for balancing the budget. And given that there are other solutions – namely progressive revenue – we are not in a last-resort situation.
Washington’s Rainy Day Fund ranks last compared to all other states. Specifically, Washington state could run on only its Rainy Day Fund for 12.8 days, compared to the national median of 46.9 days. Reducing this use of the fund as much as possible can help ensure those funds can be available for truly rainy day uses – like a global pandemic or economic depression – rather than short-term budget-balancing needs caused by a regressive tax code.
Enacting progressive revenue as soon as possible is the only equitable way to balance the budget
As mentioned earlier in this piece, it is good news that the governor supports a Millionaires Tax on people who make more than $1 million in income annually. The revenue from this kind of policy will make a big difference for the well-being of our communities in the long term. The policy will also make our state tax code more equitable. (We will release more analysis when the official bill is announced in the legislature.)
The governor also proposed ending a few outdated tax breaks for this year’s budget: a sales tax exemption for data center refurbishment, a preferential business and occupation (B&O) tax rate for prescription drug wholesalers, and a B&O tax exemption for companies paying the insurance premiums tax. This would raise $145 million in revenue.
But it’s disappointing that he didn’t propose any revenue that would substantially address the $2.3 billion budget shortfall this year. Legislators must take a different approach. They can make adjustments to the popular capital gains tax this year, to raise short-term revenue from the households in Washington who have seen unprecedented tax cuts from H.R. 1. They must also enact two other progressive revenue options that could go into effect sooner than the Millionaires Tax – the Well Washington Fund (an employer-paid 5% payroll tax on wages above $125,000) and the tax on financial intangible assets (also known as the Wealth Tax). Estimates show these two policies alone could bring in $3 billion to over $6 billion a year moving forward.
As budget negotiations happen in the coming weeks, we look forward to bold ideas and proposals by both the House and Senate to avoid cuts and better address the current budget shortfall. We urge lawmakers to put forward a final budget that prioritizes everyday people in Washington state over the wealthy few.
For more resources about the state budget, see our budget and tax analysis webpage. To request more information or to inquire about a budget presentation to your organization, email us at bnpinfo@budgetandpolicy.org.
