Budget forecast darkens

OLYMPIA – The state’s projected budget gap grew by about $200 million Friday.

Chief economic forecaster Arun Raha said revenue won’t be off that much, but the state is expecting to pay out more for services.

That means the gap between what the state can expect to collect with its current taxes and fees, and what it would have to pay out if all programs, services and state wages continued at their current levels, is about $2.8 billion.

“The Great Recession may be over but has wrought havoc on the economy,” Raha said during a meeting of the Economic and Revenue Forecast Council. “Revenues are bumping along the bottom. We are not out of the woods yet.”

The slow recovery is likely to continue, with Washington doing better than many other states, Raha said. Bright spots are a couple of big industries – aerospace and software – that are stable, good home sales late in 2009 because of a federal tax credit, and an increased demand for exports.

The optimism has to be tempered with the realities of tight credit, particularly for small businesses that rely on local banks for loans, and high unemployment, he said. Consumers spent more than expected at the end of last year, but consumer confidence remains low.

Raha’s revenue forecast for the remainder of the state’s biennial budget cycle is down $31.5 million from three months ago. It is the smallest drop since the recession began in 2008, he said. But combined with other factors, including a state Supreme Court ruling on taxes, he projected the state has a budget shortfall of $2.8 billion, up from the $2.6 billion figure Gov. Chris Gregoire and legislators have been using the past three months.

Gregoire and leaders of both parties had been waiting for Friday’s forecast, and the estimate of demand for programs and services, known as the caseload forecast, before announcing complete budget plans. Gregoire’s revised budget will be released next week, Victor Moore of the Office of Financial Management said.

The forecast for the next biennium, from mid-2011 through mid-2013, calls for growth of about $3 billion, Raha said.

But there are trouble spots, he added. Home sales could slack off again when a federal tax credit expires later this year. The state and nation both have an excess of commercial real estate. Construction, which is a significant job creator, is weak. If people really want to help the economy, he joked, they should buy a house, or better yet, a strip mall.

Democrats and Republicans who sit on the council had different reactions to Raha’s forecast. Rep. Ross Hunter, D-Bellevue, said the state needs to use its limited resources to focus tax relief in areas with the highest unemployment and make sure Washington businesses are competing equally, closing some tax loopholes that allow some businesses to avoid paying their fair share.

Rep. Ed Orcutt, a Republican, said the first thing the Legislature needed to do was not harm any recovery by passing a tax increase, and to lower other business expenses such as unemployment insurance and workers’ compensation.

The forecast also generated wildly different responses from groups watching the legislative battles over cutting the budget or raising taxes.

Rebuilding Our Economic Future Coalition, a group of 130 health, education and social service organizations, said in a press release the forecast signals a time for the Legislature to fight cuts to state programs with “a responsible plan to close unfair tax loopholes and identify new sources of revenue.”

The Washington Policy Center, a conservative think tank, said projections for revenue to improve in the coming biennium rely heavily on consumer spending, which could be harmed with tax increases, particularly a proposal in the state House of Representatives to increase the sales tax by 1 percent while unemployment remains high.

Both sides plan to bring their arguments to Olympia on Monday. The Evergreen Freedom Foundation is holding a “Taxpayers Pushback” at 10 a.m. on the Capitol steps for residents to argue against any move to raise taxes. The coalition will gather at noon on the steps to support new taxes to avoid further cuts to services.