State tax revenue expected to rise by $959 million

OLYMPIA — State coffers will swell by more than $959 million over the next three years, erasing a projected state deficit that had worried the governor and legislators.

Still, even with that good news, revenue officials raised warning flags, predicting that a slowdown in the construction industry will drag down the state’s economic expansion before long.

“We’re in the black,” state budget director Victor Moore said Thursday after the state Revenue Forecast Council announced the largest windfall the state has ever gotten in a single forecast update.

Counting money that lawmakers socked away into savings accounts, the state now has reserves of nearly $1.5 billion.

Gov. Chris Gregoire has begun writing a new two-year budget and will not propose tax increases, said Marty Brown, the governor’s legislative director.

But budget and revenue officials also found a dark lining in Thursday’s silver cloud.

The state’s sizzling construction and housing sector is ripe for a major correction and other factors could hammer the state and national economies in the next few years, said Chang Mook Sohn, the state’s chief economist.

Sohn said the state isn’t expected to dip into a recession, but that signs of a slowdown are on the horizon.

“We can’t assume that this hot economy can continue into the next biennium,” he told the forecast council, a bipartisan panel of legislative and administration financial experts. “My worry is that even this number could be too optimistic.”

His biggest concern is that the state’s recent economic and revenue expansion has been heavily dependent on a single sector of the economy, the construction and housing industry.

That sector accounts for about 7 percent of the overall state jobs, but the construction and housing surge in recent years has accounted for 20 percent of the job growth, he said.

That’s not sustainable and the number will surely drop back to more usual numbers, he said.

“As housing goes, so goes the economy,” Sohn said in remarks once associated with Washington’s aerospace industry. “That is why we are cautious and worried at this time.”

He also warned that the economy could slow down due to higher oil and gas prices, instability in the Middle East, rising consumer debt and higher inflation.

Council chairman Rep. Jim McIntire, D-Seattle, an economist who heads the House Finance Committee, remarked on the unusual forecast that features a huge and welcome influx of nearly $1 billion, yet myriad warning signs on the horizon.

“Partly sunny, partly gloomy,” he quipped.

The new projection adds nearly $524 million more for the year remaining in this two-year budget period, plus another $436 million in the upcoming biennium.

Actual tax collections are up $135 million above the level presumed in the February forecast.

The new projection erased the $718 million deficit that the budget office had forecast for next year.

“It’s a great day to be budget director,” Moore said, quickly adding that both revenue and spending numbers are in flux and that great discipline is needed.

Republican lawmakers on the panel, Sen. Joe Zarelli of Ridgefield and Rep. Ed Orcutt of Kalama, noted the warnings about the softness of the economy and urged fellow legislators to watch every penny. Zarelli said he will renew his call for a constitutional “rainy day” fund that could be tapped in future recessions.

Gregoire said she was pleased with the news, but agreed with the suggestions for caution.

“I remain committed to getting the state off the roller-coaster of spending in good times only to put ourselves in the hole when the economy turns down,” she said in a statement.

“That is exactly why we put away over $940 million this year for future spending. We do face large and competing needs and must continue to be smart and accountable with every public dollar.”

The governor’s reference was to Democrats’ decision to create savings accounts for education, health care and pension expenses that will come due next year.

Sen. Mark Doumit, D-Cathlamet, said the new forecast and the savings accounts combine to give the state the first “sustainable” budget in years, meaning the Legislature should be able to write the next budget without tax hikes or major spending cuts.

“This is very good news,” he said.