The driver behind Washington state’s budget shortfall

Earlier this month, state officials reported that the operating budget faces a $10-12 billion deficit over the next four years.

Unlike during the Great Recession, the budget deficit isn’t due to a decline in revenue, as many of the state’s tax collections are at record levels while other new taxes have been imposed.

Although the state Economic and Revenue Forecast Council recently lowered expected revenue for the current and next biennium by $270 million, the state Department of Revenue reports that all state taxes generated $35.4 billion for the fiscal year 2023, a 5.8% increase from the 2022 fiscal year.

In that timeframe, the state sales tax revenue increased by 6.2%, while revenue from that has doubled since 2014, from $8 billion to almost $16 billion.

Other taxes have also had significant increases over the past 10 years. In the fiscal year 2023, the property tax brought in $4.5 billion. In 2014, it brought in $2 billion.

One major tax to buck that trend is the real estate excise tax, which brought in $1.4 billion in the 2023 fiscal year, a 44% decrease from 2022. Yet, it’s still higher than the amount generated in 2007 when the housing market was at its peak.

Other significant tax increases or major new taxes include:

• The estate tax, which increased from $366 million in 2022 to $847 million in 2023, a 131% increase.

• The capital gains tax, which started collections in 2023 and brought in $847 million.

• The business and occupation tax, which increased from $6 billion in 2022 to $6.6 billion in 2023, an 11% increase.

Overall, state revenue has almost doubled compared to 2014, when it brought in $17.8 billion.

During the Great Recession, state revenue began to decline beginning in the 2009 fiscal year. Revenue would not begin to increase until the 2011 fiscal year, which was still below 2008 revenue levels. Revenue finally went above 2008 in 2013. As a result, the state Legislature faced major budget deficits, including $5.1 billion in 2011 alone.

In his Nov. 8 memo to state agency directors, Office of Financial Management Director Pat Sullivan attributed the budget deficit “to the recent revenue forecasts that were adjusted down and the increase in caseloads and the cost to maintain existing programs.”

“Transportation budget revenue projections also have trended down for several forecasts,” he wrote. “That, along with rising costs and increasing demands, has created a situation where revenues are not covering current commitments.”

Reacting to ERFC’s latest revenue forecast, Senate Ways & Means Chair June Robinson, D-Everett, wrote in a statement that “I will work with my colleagues and our incoming Governor to serve the needs of the people of Washington and provide the services they expect from their state government. At the same time, we need to right-size government to fit our post-COVID reality.”

She added that “during the pandemic, many of our decisions centered on helping Washingtonians, schools, small businesses, and others simply survive the unprecedented challenges they faced. Now, as we look to the future, we’re building budgets that allow us to prioritize growth and sustainability without COVID overshadowing every decision. This is an opportunity to refine our focus and ensure our resources align with the needs of the people of Washington.”

Elected officials like ERFC Chair Lynda Wilson, R-Vancouver, argue that the budget situation isn’t quite as dire as it’s made out to be. In a statement she wrote that “the chief economist warned our council that the state’s economic growth would be slow this year, and that has been the case. But still, between projected revenue and available reserves there is more than enough to balance a 2025-27 operating budget that maintains the services and programs being provided now.”

She added that “the problem – and the reason our Democratic colleagues are already talking about tax increases – is the billions of dollars’ worth of new spending requests we are likely to see in the governor’s budget proposal. Those include $4 billion tied to new collective bargaining agreements with state workers.”

Posting on X in reaction to the proposed bargaining agreements, Washington GOP Chairman Jim Walsh, R-Aberdeen wrote that “I'll believe this projected state budget deficit is a real crisis when left-wing bureaucrats in Olympia start acting like it's a real crisis. Until then, I'll assume the projection is just an excuse to raise state taxes even higher.”

Making a similar claim is Washington Policy Center’s Small Business Center Director Mark Harmsworth, a former state legislator. In a recent blog post he wrote that “the state does not have a revenue problem, it has a spending problem. It seems the budget deficit is a state-created spending problem that the state leaders don’t want to acknowledge.”