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Tax hikes balancing budget in weak economy

Arun Raha, Washington state's chief economist, explains his forecast for the current and coming biennia at the meeting of the Economic and Revenue Forecast Council on June 17. (Jim Camden/Spokesman-Review)
Arun Raha, Washington state's chief economist, explains his forecast for the current and coming biennia at the meeting of the Economic and Revenue Forecast Council on June 17. (Jim Camden/Spokesman-Review)

OLYMPIA – The economic recovery lost some momentum in May, but Washington state’s budget picture is slowly improving and the forecasts are no longer awash in red ink, the state’s chief economist said Thursday.

That could change, however, if the federal government doesn’t come through with nearly $500 million in extra Medicaid money the state is counting on.The main reason the forecast for the state general fund budget moved from red to black by some $558 million can be summed up in two words: new taxes.

“Things are slowly getting better,” Chief Economist Arun Raha said Thursday at the Economic and Revenue Forecast Council’s quarterly meeting, adding, however, “The economic recovery appeared to lose steam in May.”

Raha’s presentation to the council was a potpourri of good news and bad news. On the plus side:

 Exports are strong and Asian countries are in a good position to buy. Washington has more jobs from exports than any other state, and 88 percent of the state’s exports go to Asia. That will help the state recover faster than most of the nation.

 Businesses are spending more on equipment and software. Jobs in software and manufacturing, particularly airplanes, are up.

 Personal income is growing, and auto sales are improving.

On the minus side:

 Construction jobs are down, and construction of nonresidential projects is in its worst slump in 30 years; residential construction is improving, although slowly. Job growth overall was “disappointing” in May, after several good months, and most of the growth last month was temporary jobs for the U.S. Census. Some employers are holding off on new hires because of economic uncertainty, Raha said.

 The housing market, particularly in Seattle, has a high level of unsold homes, and that may not change until mid-2011. Home sales are expected to “flatten out” because a federal tax credit expired.

 Small businesses still struggle to get loans, because regional banks still have asset problems.

While personal income is growing, the state’s revenue is growing faster. That’s mainly due to the new taxes approved by Democrats in the legislative session. Taxes were levied or raised on cigarettes, soda, candy, bottled water and beer, and some business taxes, both for in-state companies and out-of-state firms who have branches or sales here, also went up.

The state can expect an extra $558 million in revenue that wasn’t projected in the spring from new taxes. The revenue outlook for 2011-13 is up $1.8 billion, and most of that is due to more taxes, too.

The biggest budget problem looming for the state is something that’s on Raha’s balance sheet but might not materialize, a promise of $480 million in extra federal money for Medicaid services. Gov. Chris Gregoire and Democrats in charge of the Legislature wrote that money into the budget based on statements by the Obama administration and congressional leaders that it would be approved. It serves as an ending balance, essentially a cushion to have on hand as the state moves into the 2011-13 biennium.

But Congress has yet to approve it. A bill that had the money in it failed on a test vote in the Senate Wednesday, and another proposal may get a vote later this week. But if it passes it must get through the House.

Sen. Joe Zarelli, R-Ridgefield, a member of the forecast council, said Gregoire’s office should set a “drop dead” date on waiting for that federal money. After that date, it should take steps to cut the budget by executive action or call another special session of the Legislature.

Zarelli suggested at the meeting that should be Aug. 1, but in a later press release moved it to Aug. 9, when Congress is expected to break for summer recess.

Rep. Ross Hunter, D-Medina, another council member, agreed the state would have to take some steps in August or September if the Congress hasn’t approved the money.

Marty Brown, director of the Office of Financial Management, said the across-the-board cuts the governor can make unilaterally are limited. Basic education, pension payments and debt service can’t be cut, so the Department of Social and Health Services “gets rocked … that’s where the money is.”

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