Washington Research Council Blog

Charts comparing Hunter and Gregoire supplemental budgets

I have prepared two pie charts that allow a comparison of Rep. Hunter’s supplemental budget proposal to the "Book 1" supplemental budget that Gov. Gregoire released in November. By the governor’s reckoning at that point in time, the state faced a shortfall of nearly $2 billion in the general fund–state budget for the remainder of the 2011–13 biennium. (This number was predicated on her desire that projected reserves [the ending balances the GF-S itself and the budget stabilization account] total $600 million.)

The first chart divides Gov. Gregoire’s solution to the problem into five slices: $176 million in transfers of funds to the GF-S; $74 million in reductions in distributions of funds from the GF-S to state and county governments; $389 million from delaying payments to school districts; $1,240 million net in policy level reductions to appropriations for the biennium and $102 million in maintenance level reductions to appropriations for the biennium. (Maintenance level reductions largely reflect reductions in the forecasts of costs of entitlement programs such as medical assistance and state funding for basic education.)

Gov. Gregoire also prepared a second "Book 2" budget proposal, which included $836 million of new revenue. With the additional revenue, policy level spending cuts would be reduced to $404 million.

The second chart shows the solution embodied in Rep. Hunter’s budget, which builds upon the supplemental budget passed during the December special session of the legislature. Rep. Hunter’s solution gets about as much from fund transfers, reduced distributions to cities and counties, and delayed payments to school districts as did Gov. Gregoire. The recent revision the forecast of GF-S revenues provides $45 million; new revenue (the change with respect to unclaimed property enacted during the December special session, and proposals to tax roll-your-own cigarette machines and to limit the B&O 1^st mortgage deduction so that it only applies to community banks) provides $85 million; and reducing the projected ending reserves to $500 million contributes about $100 million.

 

The biggest differences between the Hunter and Gregoire supplemental proposals involve policy level and maintenance level spending cuts. Recent caseload forecast reductions allow $430 million in maintenance level spending cuts in Rep. Hunter’s supplemental; consequently his supplemental requires only $677 million in policy level cuts, which is a little mort than one-half of the policy level cuts in Gov. Gregoire’s Book 1 budget.

The Alexander Striker

This afternoon, Rep. Alexander has proposed a striking amendment to PSHB 2127, the House Ways and Means Committee Chair's proposed 2012 supplemental.  (I discussed the chair's proposal in a post earlier today.)

Alexander's striker defines the budget problem as being $1.593 billion (near general fund-state plus opportunity pathways, NGFS+).  It is larger than the Chair's problem of $1.472 billion because it would leave a larger ending reserve ($625 million).

The striker includes new revenues ($127.0 million), fund transfers ($66.5 million), spending reversions ($160.0 million), and policy level spending reductions ($817.2 million). 

Unlike the Chair's proposal, the striker would:

• Eliminate funding for the Housing and Essential Needs program.
• Limit eligibility for the state-subsidized Working Connections Child Care program.
• Reduce TANF cash grants by 5 percent and reduce the time limit for recipients.
• Eliminate the state food assistance program.
• Eliminate Disability Lifeline medical.
• Eliminate the Basic Health Plan.
• Reduce funding for Running Start.
• Freeze the salary step for certificated instructional and administrative staff and classified staff for FY 2013.
• Reduce funding for higher education institutions (but not by as much as the Chair's proposal).
• Change state need grant eligibility.
• Make employees of state agencies and institutions of higher education subject to 24 days of temporary layoffs in FY 2013.

The striker would not change offender supervision, eliminate the state conservation commission, or shift school apportionment funds or levy equalization.

The chart below compares the spending reductions in the Alexander striker to those in the Chair's proposal.  (It is adjusted for the public schools spending shifts in the Chair's proposal.)

House Chair's Proposed Supplemental

Today Rep. Hunter, chair of the House Ways and Means Committee, released his proposed 2012 supplemental budget.  The budget overview document describes the near general fund-state plus opportunity pathways (NGFS+) budget problem as being $1.472 billion (including reserves totalling $504 million).

This problem statement takes into account significant maintenance level savings and a positive February revenue forecast.  The proposed supplemental would increase revenues by $114.5 million, transfer $53.7 million into the general fund from other accounts, and make policy level reductions totalling $881.5 million.

New state revenues would include reducing certain distributions to local governments (but local governments would get increased local option taxing authority) and limiting the mortgage B&O tax deduction.  Funds would be transferred to the general fund from several accounts, including the Education Savings Account and the Public Service Revolving Account.

Spending reductions would total $1.216 billion.  Of that, $334.9 million is from maintenance level changes.  Every budget area would be cut (see table below); some significant changes are:

• Initiative 1163 (regarding long-term care training and certification) would be funded.
  
• Regional Support Networks (RSN) Medicaid rates and RSN non-Medicaid funding would be reduced.
• Temporary Assistance for Needy Families/Working Connections Child Care programs would see reduced funding due to caseload changes.
• Indigent assistance grants to hospitals would be eliminated.
• Changes to Critical Access Hospital rates will be made.
• Public health funding would be discontinued Jan. 1, 2013 (and partially replaced with liquor excise tax distributions).
• The length of supervision of offenders would be reduced to 12 months (except for sex offenders, who would be supervised for 24 months).
• The State Conservation Commission would be eliminated, effective July 1, 2012.
• June 2013 apportionment payments to school districts would be shifted from the last business day of June 2013 to the first business day of July 2013.
• May and June 2013 levy equalization payments would be shifted to July 2013.
• State funding for UW, WSU, EWU, CWU, Evergreen, and the community and technical college system would be reduced by 3 percent; funding for WWU would be reduced by 2.5 percent.
• Funding for the Office of Student Financial Assistance would be transferred to the new Student Achievement Council.
• The funding rate for the Public Employees' Benefits Board would be reduced from $850 to $800 per employee per month for FY 2013.

Below is a comparison of the changes (policy and maintenance) in the chair's proposal and the governor's updated proposal:

The chart includes the shift in school apportionment funds ($340 million) that is included in both the governor's and the chair's proposal, and it includes the levy equalization shift of $74.8 million that is in the chair's proposal.

Revision to state revenue forecast adds $95.7 million for 2011-13 biennium

The headline number for today's revision to the state general fund revenue forecast is a gain of $95.7 million, taking expected revenues for the 2011-13 biennium to $30.284 billion. However, $50.6 million of the $95.7 gain is due to actions taken in the December 2011 special session of the legislature allowing unclaimed property seized by the state to be sold more quickly than had previously been the case. As this $50.6 million was already known to budget writers, the true "news" is a gain of about $50 million.

Another bit of positive news from the forecast council meeting was interum executive director Steve Lerch's estimate that extension of the federal payroll-tax cut to year end and renewal of the expiring unemployment insurance benfits might add $50-$75 million to revenues if enacted by congress, as now seems to be likely. 

The forecast council press release is available here.  The handout from the meeting, with details on the revised forecast, is available here.

State's monthly Economic and Revenue Update contains a bit of good news

The state Forecast Council’s monthly Economic and Revenue Update (available here), which was released this afternoon, contains a bit of good news on revenue collections over the last month. Here is the summary:

• The preliminary February forecast for the U.S. economy is similar to the November forecast, with continued concerns about downside risks.
• Washington’s economy is narrowly outperforming the national economy thanks to aerospace, software, and exports; but the recovery remains unusually slow and the risks remain unusually high.
• Major General Fund-State revenue collections for the January 11 – February 10, 2012 collection period were $54.0 million (4.4%) higher than the November forecast, but almost half of the positive variance was due to legislation passed in December that increased transfers of unclaimed property into the General Fund.
• Cumulatively, collections since the November forecast are $44.8 million (1.1%) higher than forecasted. Without the extra unclaimed property revenue, and $17.5 million in unexpected one-time refunds that occurred over the past two months, cumulative collections would have been $37.5 million (1.0%) above the forecast.

This report on collections is the final input for the revised state revenue forecast, which will be presented at 10 AM Thursday morning. The preliminary February economic forecast for the state (available here) is little changed from the November economic forecast. All in all, I don’t expect Thursday’s revenue forecast revisions to be large.

Why it's a mistake to increase capital gains taxes

In an earlier column, I pointed out that several problems with proposals to tax capital gains in our state. With key legislators, including the Senate Ways and Means chair, still promoting the idea, I wanted to call attention to a recent blog post from the American Enterprise Institute. Some very effective debunking of prevalent myths.

 As a new study from Ernst and Young shows, taking into account both the corporate and investor level taxes on corporate profits and state level taxes, the United States has among the highest integrated tax rates among developed countries. 

RTWT

New Brief: The First 2012 Supplemental Budget

During this legislative session, legislators must close a significant 2011-13 budget shortfall.  They started the work during the special session late last year.  In a new policy brief today, we look at the 2012 supplemental that was enacted in December.  It solved only part of the budget problem. 

Seattle Times, Microsoft executive urge action on higher education

Sunday's Seattle Times carried a strong editorial page call to action. "Losing kids on the path to prosperity" charts a course from early learning through higher education. Editorial page editor Kate Riley explains the urgency.

The state of Washington's education system — and by system, we mean the ways we educate our citizens from birth through graduate school — is imperiled. State decision-makers over the years have prioritized many things over this core function of government, which underpins our economy and quality of life.

She singles out a significant higher education gap.

The state's higher-ed institutions are economic engines in their communities, educating our own citizens to take the jobs our businesses offer. But there is a gap: Even in this era of high unemployment, many jobs in our state want for qualified Washington applicants.

Elsewhere on the page, Microsoft General Counsel and EVP Brad Smith makes the case for widespread reform, noting that the budget challenge creates an opportunity to make substantial progress.

The education debate this legislative session cannot be limited to a conversation about funding. Because the solution is not just investment; it requires putting our dollars into what works in helping students succeed. Student success is the single most important outcome against which our teachers and schools should be measured. And it is toward that outcome that our public resources should be directed.

I encourage you to read the whole thing. 

Tax Foundation: WA has nation's 7th best business tax climate. There's more.

The Tax Foundation, a respected national tax policy research group, released its annual report ranking the business tax climate in the 50 states. As it has in the past, the group gives Washington generally high marks. This year, the state comes in No. 7, up one from last year's 8th place ranking. 

Here's the TF news release, blog post, and full study.  

Although we've been critical of the TF methodology in the past (see here, for example), we believe the study provides an abundance of good information about state tax policy and its impact on business. Moreover, they have consistently improved their methodology. Our criticism focuses on two issues:

1. It's not clear to us that it is possible to rank states fairly on a single business tax climate index. There's simply too much variation in how tax policy treats different sectors for the ranking to be as clean as most analysts would like.
2. The TF methodology gives extraordinary weight to income tax issues. The top 10 states in this year's ranking are, in order, Wyoming, South Dakota, Nevada, Alaska, Florida, New Hampshire, Washington, Montana, Texas and Utah. 

TF explictily accepts the charge of overweighting the absence of a major tax.

It is obvious that the absence of a major tax is a dominant factor in vaulting many of these 10 states to the top of the rankings. Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: the corporate tax, the individual income tax, or the sales tax. 

Several of these states, including Washington, have also been high growth states. As noted in our analysis of Initiative 1098, states with steep progressive income tax rates have been substantial losers in the competition for jobs and investment. In that policy brief, we cited the 2010 TF report,

No matter what the average rates are, the high marginal rates will affect the state’s position in several prominent national business climate rankings. Washington ranks 9th best in the Tax Foundation’s 2010 State Business Tax Climate Index. The overall index bends five major components indexes: corporate tax, individual income tax, sales tax, unemployment insurance tax and property tax. Washington ranked 33rd, 1st, 50th, 26th, and 21st respectively in these components. The state’s high overall ranking was largely dueto the lack of an income tax, which resulted in the “number one” ranking in that component.

This year, we rank 30th in corporate tax, 1st in individual income tax, 48th in sales tax, 18th in unemployment insurance and 22nd in property tax.

It's important to read the Tax Foundation report as one useful barometer of business tax climate. Another, complementary, approach is taken by the Council on State Taxation. We reported on the COST business tax study in a blog post last summer. The crux:

COST finds that state and local business taxes in Washington amount to 5.4 percent of Gross State Product, significantly higher than the US average of 5.0 percent. 

In my column this morning, I write about legislative proposals for a new personal and business income tax, a capital gains tax, and extending the sales tax to personal and professional services. Each of these proposals would exert a drag on our business tax climate. I'll not go into detail here. Please read the column. I should note this finding from the TF report:

States with the worst scores on the [sales tax]  are Hawaii, New Mexico, Washington, South Dakota and North Carolina. Their tax systems hamper economic growth by including too many business inputs, excluding too many consumer goods and services, and/or excessive rates of excise taxation.

Keep that in mind when you hear charges of "excessive" use of tax incentives in this state. 

We and others have been critical of business taxes here. There's room for improvement. And there are some things we're getting right. It would be a tragic mistake to use the good news to promote bad business tax proposals. 

New Brief: The Drag of Unfunded Commitments

During the current legislative session, legislators must close a significant remaining 2011-13 budget shortfall. When in a situation like this, it is tempting to suspend programs rather than eliminate them, in the hopes that the economy will improve in the next biennium.  Indeed, legislators have deferred spending on various programs, in this biennium and previously.

Our latest policy brief looks at three examples of such deferred spending: I-728, I-732 and paid family leave.  These programs have already been suspended by the legislature so that they will not be funded in 2011-13 (and, in the case of paid family leave, 2013-15).

Instead of pushing spending forward, the legislature should simply end programs that are not priorities.  Otherwise, by remaining on the books, they are built into the base of future budgets.