WashACE Blog

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.

State Senate Narrowly Passes Spending Plan - No Agreement on Taxes to Pay for It

On Saturday, the State Senate adopted an operating budget with the bare minimum of 25 yes votes, with 19 no votes and 5 members excused. Curt Woodward's AP story explains it wasn't easy.

The Senate budget, a product of the Democratic majority, cleared its latest hurdle on a back-and-forth 25-19 vote. Several Democrats voted against their own budget, and a couple of senators had to switch their votes at the last minute to ensure the package would get the minimum number of "yes" votes required for approval.

The tax vote will be more difficult. Woodward writes:

As drafted, the Senate tax plan includes a three-tenths of a penny sales tax increase, a raft of deleted tax exemptions, and a $1-per-pack cigarette tax hike. But Democrats already are backing away from key portions, including a plan to drop the sales-tax exemption on the value of trade-in cars.

At least one Democrat who voted for the budget is not a sure bet for the tax vote.

[Sen. Chris] Marr said later he switched to yes “in the interest of moving ahead” but still has serious concerns that the budget cuts aren’t enough and proposed tax increases are too large.

...Although Democrats have 31 seats in the Senate, they don’t yet have 25 votes for a tax plan, Marr said: “Now we begin the discussions in earnest around loopholes and tax proposals.”

Senate Democrats post their account of the budget action here. Statements also from Republican leader Sen. Mike Hewitt and the GOP's budget leader Sen. Joe Zarelli.

Woodward reports that Democrats in both chambers are having trouble agreeing on taxes. Last week the Senate produced a tax plan that would have raised about $950 million.

Votes on bills to collect the revenue have not been scheduled, indicating there may not be support in the caucus.

That may not be enough money. At a Senate budget committee hearing Friday, Democrats restored what Republican members estimated was $70 million in spending.

And in the House, the on-again, off-again scheduled release of a revenue plan remains off again. unless you count this title-only bill. That doesn't mean they're not giving this a whole lot of thought. Jerry Cornfield's Petri Dish blog for the Everett Herald links to 8 pages of mostly bad revenue proposals submitted by House Democrats. 

Just a thought, here, but I'd guess that the smaller the revenue target, the better chance they have of getting agreement on how to reach it. Keep the tax number low, very low.

Legislators Still Split on Tax Hikes; Should Focus on Reining in Spending

The Seattle Times has another story today on the apparent stalemate in Olympia on tax increases. Andrew Garber writes,

...it increasingly appears the Legislature is high centered when it comes to increasing taxes.

...House Democrats have repeatedly delayed announcing the taxes they support increasing, saying they haven't yet reached a consensus. Their caucus has considered several options and was counting votes Friday to see which ones had the most support.

There's still a divide in the House between lawmakers who support a sales-tax increase and those who prefer closing tax exemptions as a way to raise money.

That's a choice Washington Roundtable president Steve Mullin described this way in yesterday's Times:

"Our view is, it's sort of like asking: 'Do you want death by lethal injection or death by hanging,' " Roundtable President Steve Mullin, said of sales taxes versus exemptions. "We'd prefer to stay alive."

In Washington State Wire, Erik Smith touches on a theme also found in Garber's story, suggesting business groups lean toward a sales tax.

The trouble is that the House and Senate proposals hit individual businesses in dozens of ways, some of which are not fully understood at this point, [Association of Washington Business lobbyists Amber] Carter said. And lawmakers might want to rethink the whole thing.

AWB isn’t endorsing a tax increase, mind you, she said, but there is some talk in Democratic circles of a one-cent sales tax increase that could raise $1 billion a year and avoid most of the troubles. “Lawmakers seem bent on raising taxes,” she said. “We’re not in favor of that. We feel the state should live within its means. But if taxes are raised, we feel that they should be broader-based and should not just place the burden on a few industries.”

The key message is clear: rein in spending. Business is not endorsing tax increases, or choosing between lethal injection or the noose. Lobbyists for specific industries will work to make sure their clients are not adversely affected by the tax changes being considered now. And, Smith writes here, one group - auto dealers - appear to have saved the sales tax credit for trade-ins.

It's premature to talk about tax hikes without having pushed hard to reopen public employee union contracts, considering reasonable privatization options, or  having done what's necessary to win federal Race to the Top funding. And, premature or not, tax hikes of the magnitude being discussed will increase unemployment and delay recovery. 

WashACE Friday Morning Briefing Posted to the Site

Each week, we post the WashACE Friday morning telephone briefing, held from 7:30 a.m. to 8:00 a.m. to our website. Listen here.

And to register for the call, sign up here. Everyone's welcome.

Looking for the Least Bad Alternative to Resolve State Budget Shortfall

In today's Puget Sound Business Journal, I have a column on the budget endgame. The piece was written before the House and Senate budget plans came out this week. But I think it holds up. The Senate revenue plan includes a 0.3 percentage point hike in the sales tax rate. The House continues to struggle with its work, having twice postponed release of a tax package. They may have one today, or maybe Monday. Least bad alternatives face stubborn opposition.

However they resolve the situation, there will be another crisis next year. Here's how I characterized it in the PSBJ:

A depressing inevitability haunts Olympia. Tacky rhetorical sunshine no longer brightens the dome. A “crisis too good to waste” has been wasted. The multibillion-dollar shortfall failed to spur innovation and restructuring.

Timing plays a role. Major reforms take time to implement. Savings are rarely realized immediately... With another shortfall expected next year, it might make sense to plan ahead.

But this has been the session of the here-and-now. Fiscal reforms — privatization, restructuring, right-sizing the state payroll — don’t get much attention. Why offend favored constituencies, like state workers, when doing so won’t solve the immediate problem? Even going after a minor giveback like furlough days, which will capture savings now, sparked a major union hissy fit. Overreacting to small stuff works well for powerful lobbies, who find they then have little to fear from major challenges to their hegemony.

Thirteen days remain in the regular session.

The Seattle Times has a good account of the tax discussions. The Everett Herald offers a thoughtful assessment of the tax plans that have been introduced. They also note the lack of restructuring during the fiscal crisis.

The state will likely continue doing things it shouldn't — such as distributing liquor — and state employees will avoid many of the pay and benefit cuts private-sector workers have been making for years. Meanwhile, important priorities like education will suffer.

This will be the key issue in this fall's legislative elections.

What do you think?

Voter-Approved Taxpayer Protection Gone for Now - Economy Shows Signs of Weakness

Yesterday Gov. Gregoire signed legislation temporarily suspending the I-960 supermajority requirement for tax increases.

The initiative, approved by voters in 2007, requires two-thirds approval from legislators to raise taxes - a significant hurdle compared with the simple majority needed to pass other measures. The bill signed by Gregoire would pause most of the initiative's provisions until July 2011, when the next two-year budget cycle begins.

As the Times reports, some stuff remains.

The measure doesn't suspend all of the initiative: e-mail notifications sent to the public about proposed tax increases, including 10-year cost projections of the measures, will continue. However, the requirement of a nonbinding advisory vote by the public on taxes passed by the Legislature is suspended until July 2011. Also suspended was listing how lawmakers voted on taxes in the voter pamphlet sent out before elections.

Republicans had asked Gregoire to veto the section of the measure that suspends the public advisory vote on tax increases, but Gregoire signed the measure as it was passed by the Legislature.

The Washington Policy Center thinks it shouldn't be so easy to overturn the will of the voters.

Now, taxes can be passed with a simple majority. Senate Democrats are ready to roll. In the House, they're still working on it. 

All this occurs as evidence that unemployment continues to rise. Calculated Risk notes another uptick in initial unemployment claims.

The four-week average of weekly unemployment claims increased this week by 6,000 to 473,750.

The current level of 496,000 (and 4-week average of 473,750) are very high and suggest continuing job losses in February. This is the highest level since last November.

Also on Calculated Risk, a bleak economic report from the head of the Cleveland Fed, Sandra Pianalto.

Our current problem is a lack of job openings. In fact, the job-finding rate now stands at a historic low. Businesses are not creating new jobs very quickly, and where labor utilization is picking up, employers are simply restoring hours that had been previously cut.
...
So, to sum up, while we are likely now in a period of recovery, it doesn't really feel much like one.

Employers want to put people back to work. Increasing costs will continue to frustrate job creation.

Reforming State Government ... Much Too Slowly

Yesterday, the Columbian editorial board objected to the Legislature's "two legged stool" approach to budgeting.

The governor and legislators are moving toward further infuriating both camps as they ponder both tax increases and service cuts. They see this two-legged stool as the only way to close a $2.8 billion budget gap, oblivious to every stool’s requirement of a minimum three legs.

Why do they keep focusing on two legs while paying virtually no attention to the third strategy: reforming state government overall?

The Olympian today tackles the reform question in  an extended editorial.

Paring back the size of government is proving to be more challenging than imagined.

... It’s clear that there is no political will to pursue substantive government reform efforts.

They applaud Sen. Jim Kastama's plan

The Puyallup Democrat says a panel of elder statesmen should be convened to make recommendations for government reform that lawmakers must either vote up or down — without changes. Kastama’s proposal is modeled after the Pentagon’s base-closing commission which has taken the politics out of difficult base-closing decisions across the country.

I'm not sure about it, but it's clear things aren't working now.

AWB president Don Brunell reflects on the Olympian editorial here.

Government must innovate, change and cost less.  The rest of the world makes that clear to us each and every day when they, for example,  build factories faster and with less expense to provide newer, cheaper and better products that American use every day. Change is painful, as businesses on Main Street, corporations like Boeing, and working families are learning.

WA Editorial Writers Tell Lawmakers to Rein In Spending, Go Easy on Taxpayers

Editorial reaction to the initial spate of tax proposals from Olympia has been uncommonly direct. We cited some critical editorials earlier, noting this from a TNT editorial.

Legislators can’t tax themselves out of this hole.

Today, the Seattle Times came out swinging:

WE want to take the Legislature by the lapels and shake it. The Democrats particularly. The taxing and spending plans now running free in Olympia are their plans, and mostly bad ones.

...Democratic leaders should be focusing on the repair of this state's private sector. Instead they focus on protecting state employees and beneficiaries. Gov. Chris Gregoire proposes $605 million of tax increases — about double the right amount, we think — and [key legislative leaders]  talk of increases as high as $900 million or $1 billion. 

The editorial supports priority setting, protecting education, and restructuring state spending (An earlier Times editorial welcomes public employees to the real world of paying more for their health care benefits.

The Columbia Basin Herald takes a dim view of the new "public morality" they see lurking behind targeted tax hikes.

Instead of taxing us to curb behavior the governor thinks is bad for us, she should focus on state spending. These proposals appear to ignore the financial problems our state has faced for the last few years.

Spending more tax money than we make.

The Chronicle says the governor was right in 2004.

She was right back then when she said mixing taxes with a recession is wrong. That still holds true today.

The Daily News criticizes the governor and legislature for failing to rein in  spending.

Most disappointing, however, is the weak start on reining in spending.

...Politics — the need to cater to an influential union constituency — apparently trumps common sense with this legislative majority. It's business as usual, even as the need change the way government does business becomes abundantly clear to most everyone. This is why the Legislature is struggling against a rising tide of red ink again this year and will likely be forced to do the same next year.

Washington Post columnist David Broder, covering the winter meeting of the National Governors Association, writes that the problem is widespread and not going away soon.

[NGA executive director] Scheppach told me that the realization is beginning to spread, among governors and legislators, that this is no ordinary downturn and there will be no quick bounce-back. Therefore, “the states will have to downsize permanently,” he said.

That's reality, not partisan or ideological rhetoric. And it's time to face it.

Tell Lawmakers: Let Employers Put People Back to Work

We're glad to see WashACE visitors attracted to the site by our postcards, radio spots and newspaper ads. As the Legislature goes into its final weeks, it's vital lawmakers understand one simple message: They must rein in spending, make government more efficient and let employers do what they want to do: put people back to work,

Legislators need to hear from you. Take Action now. And for more information on how we can put people back to work, please look around the site, subscribe to the blog, and sign up for our weekly newsletters and Action Alerts.

Welcome to New Visitors - Let's Help Employers Put People Back to Work

We're glad to see WashACE visitors attracted to the site by our postcards, radio spots and newspaper ads. As the Legislature goes into its final weeks, it's vital lawmakers understand one simple message: They must rein in spending, make government more efficient and let employers do what they want to do: put people back to work,

This morning's news underscores the challenges we face. Last night, the House suspended the Initiative 960 requirement that tax hikes require a 2/3 supermajority. A similar measure has already passed the Senate, which will quickly take up the House version. Here's how the AP story sees it:

The state Senate must vote again on the measure before sending it to Gregoire, a Democrat who is expected to sign the plan into law.

Democrats say they will unveil their plans for patching the budget deficit once I-960 is suspended. The scheduled 60-day session ends on March 11.

The governor also released her tax proposal yesterday. The Seattle Times reports: 

... Gov. Chris Gregoire on Wednesday proposed raising $605 million through new taxes and by ending existing tax exemptions and credits.

Gregoire's plan contains no general sales-tax increase, as favored by some Democrats in the Legislature. Instead, the governor would focus on out-of-state companies, triple an existing chemical tax and add taxes to discretionary items such as candy, soda and cigarettes.

The News Tribune reports that the plan (rightly) concerns businesses.

Businesses that deal in those products, though, see any move to make the products more expensive as a threat. Taxes on cigarettes, candy and bottled water would be detrimental to the state’s businesses, said Amber Carter, a lobbyist for the Association of Washington Businesses.

Right now, that $605 MM looks like the opening bid in a game likely to escalate. From the Times:

...although the governor didn't propose a general sales-tax increase, the Legislature has not ruled it out.

House Majority Leader Lynn Kessler, D-Hoquiam, said she'd prefer a temporary sales-tax increase that would go away as the economy improves.

Legislators need to hear from you. Take Action by clicking the banner above. And for background on these and other issues, please look around the site, sign up for our weekly newsletters and action alerts, and stay involved.

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