WashACE Blog

Why Spending Reforms Stalled in 2010

As legislatures across the country grappled with budget shortfalls, Stateline.org reports many of them looked to liquor privatization as a strategy.

But barely a few weeks later, many of those proposals have died quietly. In Virginia and Mississippi, they were withdrawn by their sponsors. In Washington and Vermont, they are bottled up in committee.

Stateline.org notes that the reasons vary among the states. Here's their explanation for Washington.

In Washington, supporters blamed labor unions for driving opposition to the proposals. Employees at state-run liquor stores there are state employees, as are the workers in the Seattle warehouse that distributes alcohol to stores throughout the state.

That sounds accurate. And it came at a cost.

In a January report, Washington State Auditor Brian Sonntag found that the state could raise up to $350 million more over five years if it auctioned off retail store licenses and privatized the distribution center.

Meanwhile, in New Jersey, the recently elected governor is pressing a privatization agenda.

Governor Christie Thursday will create a commission to privatize as many as 2,000 state jobs beginning next January, officials said Wednesday night.

As he grapples with an $11 billion deficit in the budget he will present on Tuesday, Christie is also considering invoking the Disaster Control Act to suspend Civil Service rules to make it easier for him to lay off higher paid workers, according to two administration officials.

We'll not have a sustainable budget without structural spending reform. When the easy stuff can't get done - and liquor privatization should have been easy - it's hard to have much confidence that things will improve soon.

Two Research Council Policy Briefs to Help Sort Through the Budget Endgame

On the last day of the regular legislative session, lawmakers remain far apart in their tax and spending plans. And at this moment, it's hard to tell how quickly they'll close the gap.

The Washington Research Council has just published two reports. Yesterday, the released this assessment of the House and Senate tax plans. This morning, they followed with a comparison of the spending proposals, including a useful table showing cuts and adds, distinguishing "maintenance" (cost of continuing current programs) spending from "policy" spending (resulting from programmatic changes made by legislators). 

In the Seattle Times this morning, Andrew Garber writes that state spending is on track to rise, despite budget cuts, noting the use of some $500 million in federal money. The WRC spending brief provides more detail on that.

A couple of things in Garber's report stand out. This snippet shows the divisions within the House Democratic caucus.

House Majority Leader Lynn Kessler, D-Hoquiam, said lawmakers in her caucus who wanted more cuts in state spending "sort of got run over" by members from districts considered safe havens for Democrats.

"I think a majority of our caucus is from very safe districts where voters are very different from swing [districts] and rural areas," she said. "As a result, they just feel like we don't want to reform..."

And in the Senate, Rodney Tom, D-Bellevue, the operating budget vice chair of the Ways and Means Committee who voted against the Senate budget expresses his frustration to Garber.

Tom said he is especially troubled by proposals to spend millions to maintain health benefits for state workers instead of asking them to bear more of the cost.

"We're going to be dumping more money into that to maintain a level of service, and then we're cutting BHP [Basic Health Plan] and we're cutting nursing homes. I think that sends a mixed message of where our priorities are," he said.

Not only that, but one-time fixes such as the use of reserves and federal money set the state up "for a complete disaster next year," he said.

Opportunities lost.

Warning: Tax and Spending Mischief Dominates Last Days of Regular Session

I had been uncharacteristically optimistic that Democratic leaders would be able to iron out their fiscal differences in the allotted 60 days. That now seems highly unlikely. Gov. Gregoire says a special session is possible, apparently choosing to hold out some hope. The AP story reports that the governor's must-do list includes her education reform measure to make the state more competitive for Race to the Top dollars.

The budget challenges will be difficult to resolve. Rachel la Corte quotes two key legislative leaders.

House Majority Leader Lynn Kessler, D-Hoquiam, acknowledged it will be tough to meet the Thursday deadline "unless we come to some pretty quick agreements on substantively different revenue packages."

"It's going to be hard," she said.

Senate Majority Leader Lisa Brown, D-Spokane, agreed, but said that House and Senate leaders are working hard to get a plan approved soon.

"If it takes a few extra days, it's OK," she said.

More information on the differences between the chambers in this Olympian story.

The Seattle Times editorial board thinks a sales tax increase is a bad idea. The Daily News questions that and other elements of the legislative tax packages. And I contend that voters are in no mood to adopt an income tax.

Ken Myer, head of the Washington Technology Industry Association highlights the negative consequences of a proposed tax on custom software development.

Without any input from industry, the House passed a version of Senate Bill 6143 that includes a new tax on custom software development—a fundamental shift in tax policy that could lead to job losses, business closures and new taxes on other professional services.

Read Myer's article on Xconomy for more information. 

The Times reports that the hazardous substance tax is back in play.

The bill passed out of the Senate committee Tuesday is a slimmed-down version of the original proposal, which would have tripled the tax from the current 0.7 percent to 2 percent — raising more than $200 million a year.

...The version approved by the Ways and Means Committee would raise the tax to 1.2 percent, raising an estimated $80 million a year, but with all of it dedicated to stormwater cleanup.

We wrote about the earlier proposal here. 

Welcome to the dangerous endgame.

More on Excessive Public Employee Benefits from National Governors Association

Given the recent discussion of public employee compensation, I thought this excerpt from "The Big Reset," a report issued the National Governors Association Center for Best Practices, was worth sharing.

For many years, state and local governments have been increasing the benefit portion of employee compensation at a greater rate than the wage portion.  Much of the reasoning behind this was the belief that state government salaries could not compete with the private sector.  As a result, benefits for state employees gradually became more generous than those in the private sector while state salaries lagged.  Today, the average compensation for state and local employees exceeds that of private workers.  And, by using benefits as a compensation equalizer, states have placed long-term liabilities on their balance sheets.  States would be in much better financial shape now had they adopted competitive salaries years ago and provided a benefit package much closer in value to the private sector. (Emphasis added.)

Right.

House Passes $690 Million Tax Increase - WRC Releases Comparison of Legislative Tax Packages

Working into the early morning, House members passed tax legislation to close - or nearly close - the gap between state spending and revenues. As Jerry Cornfield writes in the Herald's Petri Dish blog, reconciling the differences between House and Senate budget plans will be challenging.

This morning's vote ended days of internal divide among Democrats and sets the stage for potentially rough and tumble talks with their colleagues in the Senate – a conversation that could push the Legislature into a special session.

One reason is the House plan doesn't contain an increase in the sales tax which is the centerpiece of a much large revenue package passed by the Senate Sunday. That $890 million proposal gets more than a third of its revenue from a three-tenths-of-a-penny boost in the sales tax.

Cornfield also notes that some Senate Democrats also object to the sales tax and that liberals in both chambers want to spend and tax more.

The Washington Research Council released last night a three-page policy brief comparing and contrasting the House and Senate tax plans. The final package will be largely an amalgam of plans adopted by the two chambers. The WRC brief highlights the major areas of agreement.

Twelve elements are substantially common to the two packages. These 12 elements would together raise about $385 million. Eleven elements, which would raise $365 million, are unique to the House package, while six elements, which would raise $505 million, are unique to the Senate package.

The largest common element is the prospective repeal of the direct sellers B&O tax exemption and the retroactive narrowing of the exemption to consumer goods. This is a response to the Dot Foods case ... and is expected to provide $155 million. The second largest common element is a $1 hike in the tax on a pack of cigarettes, from $2.025 to $3.025.

The third largest element involves the treatment of multistate service and royalty transactions under the B&O tax. Nexus for such activities would be based on economic rather than physical presence in the state and revenue would be apportioned based on sales. The fourth largest element extends the sales tax to bottled water.This is expected to yield $30 million over the remainder of this biennium.Both packages contain the controversial element regarding “abusive” taxavoidance transactions originally suggested by Governor Gregoire.

As AP's Curt  Woodward reports, there were a few changes made last night.

The House's tax plan shrunk significantly from the size originally penciled out in the chamber's budget plan. Left out were a tax increase on the investment earnings of nonfinancial firms and a business tax hike on janitorial services.

The News Tribune editorial board thinks the sales tax increase should be left out of the final bill.

It now seems too much to expect that the Democrats who control both House and Senate will squeeze more out of their core constituents – for example, by reopening state workers’ contracts, canceling scheduled raises and requiring them to pay what their private-sector counterparts do for health insurance.

...But the three-tenths percent sales tax increase in the Senate’s newly passed budget is one of the worst ways to balance a budget in a downturn this severe.

Let your legislators know you expect them to put job creation first. These tax hikes will cost Washingtonians jobs.

Tax Increases Will Hurt the Economy, Destroy Jobs

In tomorrow's Seattle Times, Washington Research Council economist Kriss Sjoblom has a good op-ed analyzing the effects of tax increases on the economy. The article is online now.

WITH Washington state lawmakers poised to adopt nearly $1 billion in new taxes on families and businesses, it's important to set the record straight.

These tax hikes will cost Washingtonians jobs and depress the economy. The damage will be greater than it would have been had lawmakers shown more restraint and cut spending deeper.

Sjoblom responds to an earlier Times op-ed arguing that spending cuts would be more damaging the tax increases. He tests the assertion.

Using a well-established economic model of the state economy, [the WRC] simulated several different $1 billion tax-increase scenarios. The simulations show increased taxes would result in the loss of 11,200 to 12,250 jobs in 2011. In contrast, a simulated spending cut of the same magnitude would cost only 8,600 jobs. If lawmakers handle the budget with spending restraint rather than raising taxes, 2,600 to 3,650 more Washingtonians keep their jobs.

Moreover, inflation-adjusted personal income is $600 to $900 million higher in 2011 when spending is cut than it is when taxes are raised.

Sjoblom's op-ed also examines the claim that state spending stimulates economic growth (as contended here).

Some of the confusion in Olympia on this point stems from a misreading of a widely publicized estimate made by Mark Zandi of Moody's Analytics. Zandi has written that an additional dollar of state government spending increases gross domestic product (GDP) by $1.41. This estimate appears in an article he wrote last October laying out a fiscal-policy road map for the federal government in 2010. The $1.41 GDP increase is for the nation as a whole and assumes that the state spending is funded by the federal borrowing. As such, the number has no relevance to a state decision to increase spending by raising its own taxes.

Right. The proposed tax increases will cost Washingtonians jobs.

Idaho Governor Recruiting Taxpayers from Washington and Oregon

At the Washington Policy Blog, Jason Mercier takes note of Idaho Gov. Butch Otter's plans to lure business from Oregon and Washington. He has Otter's letter. Here's a snippet.

Legislators in the state of Washington are talking about even bigger tax increases to tackle a budget deficit that figures to be as big as Idaho’s entire State budget. Businesses in [Oregon and Washington] are like those in Idaho; they are facing the most challenging times in decades, and even incremental cost increases can mean the difference between surviving and closing up.

I wrote about the Idaho recruiting strategy in this column in the Herald of Everett.

State Worker Compensation Needs a Rightsizing

The Seattle Times reports today on state worker pay and how it compares with the private sector. The story won't settle many arguments. The most notable weakness is the reporters' inability to look at total compensation - pay and benefits - when drawing comparisons. They acknowledge the problem.

The Times did not compare state health-care plans and pensions to the private sector. Such benefits are a major part of total state employee compensation — about 30 percent, on average — but are difficult to put present-day dollar values on and even harder to compare across different employers and job categories.

I think the difficulty is overstated. As the Times story acknowledges up front,

State employees do receive benefits that are richer than those earned by many other workers.

Particularly when it comes to health care benefits, the data are clear. For example, a 2008 analysis by the Washington Roundtable found significant disparities between public and private sector benefits.

• Washington state employee health benefit  costs are higher than those of employees in  large, private firms.  Washington state employees covered by the Public Employees  Benefits Board (PEBB) had average total health  benefit costs in 2006 that were 5.8 percent  greater than per employee costs of other large  employers in Washington state. 

• Washington state employees contribute  considerably less to their health care  coverage than the average of state employees across the country. Nationwide, the average monthly contribution  of state employees for family health care 
coverage was nearly four times that of  the $49 monthly contribution made by 
Washington state employees in 2006.  

Direct job class comparisons can be difficult. But focusing on pay alone misleads. The Times offers a glance at state workers' benefits, but provides little in the way of direct comparison.

The Times editorial board continues to challenge the generous benefit packages offered state workers, urging the state

to reopen state employee labor contracts so that workers pay more than 12 percent of their medical premiums. Gov. Chris Gregoire says she wants to do this, and could reopen the contract but that she has no leverage over the unions. We believe she has plenty of leverage and is politically reluctant to use it.

The Daily News takes the same dim view of the status quo for state workers..

The contracts also give union employees more generous health benefits than most other state or private-sector workers enjoy. The state will cover 88 percent of the health costs, leaving just 12 percent of the costs for employees to pick up. An editorial in The Spokesman-Review of Spokane last week cited a study that found workers, on average, pick up about 24 percent of the costs of their employer-provided health coverage.

While the disparities exist, voters will be justifiably questioning the decision to raise taxes.

Fitting the Budget Pieces Together

Late Friday, the House adopted a supplemental budget. Saturday, the Senate, which had previously adopted an operating budget, worked through all of the amendments to the tax plan passed out of the Ways and Means Committee Friday.

As expected, most things are moving along party lines, although Sen. Joe Zarelli managed to get consent for an amendment that if the proposed temporary 0.3 percentage point increase in the sales tax doesn't come off in three years, lawmakers lose their expense allowances. As Brad Shannon reports in the Olympian,

But it may end up as just a formality — if the Senate Democrats and House Democrats don't ultimately agree that a temporary three-tenths of 1 percent sales tax is part of the answer to closing a $2.8 billion shortfall.

The House firmly opposes it. Gov. Chris Gregoire doesn't much like it either.

I watched the debate. As Shannon writes, it got intense at times. They adjourned until noon Sunday, possibly lacking the votes to pass the package without all members present. Democratic Sen. Paull Shin had to leave early to attend a funeral.

The House, which is not meeting Sunday, is expected to adopt its revenue package on Monday. This is from Shannon's story:

HB 3176 includes about $758 million in new revenue and shifts another $100 million in revenues to general-fund accounts.

The new revenue is raised mainly through closing tax exemptions and increasing the business-occupations tax on lawyers, accountants and certain agents by 0.5 percent. HB 3176 also adds a sales tax on candy, gum, custom software, janitorial services and bottled water.

Reconciling the conflicting tax and spending plans be the work of the final days of the session, which is scheduled to end March 11. The Seattle Times editorial board weighs in with a proposed compromise, with about $512 million in new taxes including the Dot Foods fix.

I think it can bet resolved in a few days. We'll see.

A "Do Nothing" Conclusion to the Session?

Speaker Pro-Tempore Jeff Morris raises the possibility in an interview with TVW correspondent Niki Reading. Consider this:

I think something that’s not been widely talked about is not adopting a budget at all is an option. We have a supplemental budget -– if we didn’t adopt one and if we got into a cash flow issue, the governor has the authority to start doing across-the-board cuts.

Q: Really? And that’s a viable option?

Morris: Well, if we can’t get people together with either an agreed to budget number or what taxes are need to buy state services back then that would be an option. That would probably be the most draconian but one that would be the most expedient.

Astonishing. And unlikely. I still think things will come together quickly in the next few days.