Deeper drop in state revenue forecast

OLYMPIA – Washington’s treasury will take a $167 million revenue hit over the next three years due to the weakening economy, the state Economic and Revenue Forecast Council was told Thursday.

Steve Lerch, the state’s interim chief economist, told the council that sales and business taxes are down and real estate excise tax collections have seen a significant decline.

Lerch said that on the real estate tax collections, “we are forecasting what would essentially be the worst downturn we’ve seen in the past 25 years.”

“We do think this is a pretty dramatic decline in the real estate sector,” he said, though he added that predictions call for the housing market to improve later this year.

Lerch noted that in 2004 and 2005, excise tax collections were growing 20 percent to 40 percent a year. “We are coming down from a historic high,” he said.

The council’s last revenue update was in February, when a decrease of $423 million was predicted through 2011. The economy has not improved and Thursday’s declining revenue figures are in addition to the earlier forecast.

In his update, Lerch predicted that this current two-year state budget cycle, which ends June 30, 2009, will bring in about an additional $60 million less than originally predicted – $11 million due to legislation and about $50 million because of the economy.

For the two-year state budget cycle that starts July 1, 2009, the state expects to take in $163 million less, with $117 million of that due to the flagging economy.

Of the $223 million revenue hit over the next three fiscal years, $57 million is due to legislation, like tax reductions, that lawmakers have already planned for, state budget director Victor Moore and others on the council said.

Moore said that while it’s a lot of money, it’s a small percentage of the state’s $33 billion 2007-2009 general fund budget. The governor’s 2009-2011 budget proposal will be released in December.

“I don’t think it changes what we’ve been doing in terms of preparing for the next biennium,” he said. “We know there’s going to be some pretty significant belt-tightening we’re going to have to do.”

The report showed a decrease in consumer spending across the board from January through April. Lerch said people are nervous about the economy and worried about the value of their homes.

“People are clearly feeling less wealthy,” he said. That’s “contributing to a weaker forecast.”

On Wednesday, Sen. Joseph Zarelli, R-Ridgefield, called for a soft freeze on state hiring, allowing the administration to replace 25 percent of workers who leave, saving $339 million.

On Thursday, Moore said a variety of ideas are being considered to cut costs, adding that he recently asked state agencies to rein in costs on things like travel because of the high fuel costs. “It’s essential they start paring back,” Moore said.

State reserves have dropped from $850 million to $801 million. And the state budget shortfall in the 2009-2011 budget cycle is estimated to be $2.5 billion, though Moore said that was the high end of a range.

“We’ve got to find ways to get the spending down,” Zarelli said. “I think it’s becoming more and more real the fact that there is going to be a shortfall there to fill up.”

Gov. Chris Gregoire’s Republican opponent, Dino Rossi, seized on the report to blame Gregoire for “out-of-control spending.”

“Other governors across the country are taking bold steps to reduce spending,” he said in a news release, adding that the longer it takes to pare back state spending “the worse the problem will get.”

Gregoire said Washington was in better shape than most other states. “When the rest of the nation has economic problems, we are affected, too,” she said. “The Bush administration needs to take swift action to turn around the nation’s economy through initiatives that will put people to work and lower gas prices.”

Lerch said he’s not predicting that the state will go into a recession, and that employment growth and personal income growth have both been stronger in Washington than the rest of the country.

“That doesn’t mean it’s where we want to see it, but we still continue to do better than a relatively weak U.S. economy,” he said.