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State revenue inches up but impact on Washington budget debated

OLYMPIA – State Economist Steve Lerch explains one of the factors that prompted a slight increase in the state’s revenue forecast for the next two years during Thursday’s meeting of the Economic and Revenue Forecast Council. (Jim Camden / The Spokesman-Review)
By Jim Camden jimc@spokesman.com(509) 879-7461

OLYMPIA – Washington can expect to collect an extra $570 million over the next two years. So does that mean the Legislature has enough to pay for court-ordered improvements in public schools and other programs, fall short and need to raise taxes, or have so much extra it can approve tax breaks?

Depends on whom you ask.

The state’s chief economist, Steve Lerch, delivered some moderately good news about slightly higher than expected tax collections to the Economic and Revenue Forecast Council Thursday morning because of slightly better trends in key sectors since the last time he and his staff crunched numbers. Among the high points:

  • Washington’s economy and population continues to grow, and even with increases in mortgage rates, the hot construction market, particularly in Seattle and nearby communities, could continue. Strong demand and prices for homes and commercial property means continued strong collections of the real estate excise tax. “We’re seeing all that growth, and if it continues those folks are going to have to live somewhere,” Lerch said. There could be a slowdown in big commercial deals in the Seattle metropolitan area by next year, he added.
  • Consumer confidence is up, and the state collects sales tax on most things they buy. Sales tax is usually about 48 percent of the money in the general fund budget, which pays for the bulk of programs and state employee salaries. But there’s a limit, because some of the increase in sales tax comes from purchases of cars and “durable goods” – things people buy infrequently, Lerch said.
  • Wages are growing in Washington, but still pretty slowly, he said.
  • Tax collections from the state’s legal marijuana sales were up every month through September 2016, fell slightly in October and November, were up in December, then down a bit in January. The fluctuations are partly a result a steady decline in prices for marijuana products since they first became legal. Marijuana taxes are hard to predict because the market keeps changing and the state doesn’t have much historic data to track.

It is potentially the most volatile of tax revenue sources, because of comments by U.S. Attorney General Jeff Sessions opposing legalized marijuana. If Sessions were to have his way, Washington’s marijuana tax revenue would go to zero.

When these and other factors are put together, economists think the state will have about $258 million more than it expected for the biennium that ends June 30, and about $313 million more for the two-year budget cycle that starts July 1. For context, the current two-year state general fund budget has about $39 billion worth of programs, projects and salaries. The projected budget for the 2017-19 biennium is about $42 billion, and that’s without $1.4 billion to $2.7 billion for the major reforms in public school policies ordered by the state Supreme Court.

Centralia Republican John Braun, chairman of the Senate Ways and Means Committee, called the forecast “positive news.” Senate Republicans will release their proposed 2017-19 budget early next week, and the forecast provides “an opportunity to look at other ideas,” which he said could include some tax cuts that he wasn’t prepared to talk about.

“I remain confident we do not need additional revenue,” Braun said. (Editor’s note: An early version of this post misquoted Braun.)

Spokane Democrat Timm Ormsby, chairman of the House Appropriations Committee, disagreed. The state will need more money for schools, mental health programs and other areas where state support was cut during the recession, he said. The House budget, which will be released about a week after the Senate proposal, likely will include some calls for tax increases. Asked for specifics, he replied: “I think we have a lot of options and I think you’ll see it when the House budget is rolled out.”

Gov. Jay Inslee proposed several taxes to cover increased spending for schools and other budget areas, including a carbon tax and a capital gains tax on investment earnings above $25,000 per person. But neither chamber has shown much interest so far in those or other major tax increases.