Guest Post by Lewis A. McMurran (@lewismcmurran)
As 2013 unfolds, the U.S. economy appears to be healing. Good news from the housing sector is giving some hope and upside to the financial markets. Averting the so-called “fiscal cliff”, albeit only temporarily, has provided some certainty for taxpayers. Serious economic problems remain, such as the debt situation in Europe, the U.S.’ own budget and debt problems, political uncertainty in the Middle East and a still tenuous employment situation in the U.S.
Washington, like most other states, saw tax revenue drop precipitously after 2008 in the wake of the banking/housing bust and subsequent deep recession. Washington, like most other states, was unprepared for such a deep recession not holding enough cash reserves that are needed when unemployment goes up and more people seek social services to make ends meet.
Washington state government brought some of this upon itself. The legislature and outgoing governor spent almost every penny of tax revenue that came in during the boom times. They expanded eligibility for state-paid health care and social services programs when unemployment was under six percent—exactly the wrong prescription for good economic times. Granted, much of that money was also spent on improving K-12 and expanding access to higher education—both critical public policies that need to be priorities.
The result since the recession hit in full in 2008 has been major cuts to higher education, health care, social services, environment and natural resources. The state parks are now almost completely fee-based, getting minimal state support. Class sizes in some K-12 schools are way too big. The state now only funds about 36% of the cost of a college education down from over 70% two decades ago. Tuition has risen dramatically at the state’s universities. To be fair, a public college education in Washington is still a good deal compared to some other states that have also cut support for higher education.
While K-12 gets the bulk of state funds, approximately 44% of the state operating budget, the state Supreme Court found in the McCleary decision that the legislature had shirked its “paramount duty” by not providing for a “basic education” for all students in the state. Essentially this means spending more on K-12. It has been obvious for a long time that just throwing money at schools does not yield better results, whether the focus is high school graduation rates, the percentage of students going to college or teacher and principal effectiveness.
Luckily the legislature had taken major steps in the 2009-10 sessions to bring real education reform to the state’s K-12 schools. The Court cited legislative efforts to create “prototypical” schools and gave the legislature a timeline to fund the new education model. Recently the Court chided the legislature for not making more progress in complying with the McCleary decision.
With a new year, a new governor, a new legislature and a recovering economy, state lawmakers have a little breathing room to address the state budget. They are under pressure to spend at least $1 billion in new money on K-12 to comply with the McCleary decision.
But the demands on the state’s resource always outstrip the supply of tax revenue coming in and this next two year budget cycle will be no different. Washington, again like other states, is in the process of implementing the federal “Affordable” Care Act (which will be anything but). This requires expanding Medicaid to childless adults and other mandates that increase cost to the state and must be budgeted for. Long term care costs continue to rise. More people are seeking higher education to increase their skills and employability. All of these cost money.
This means there will be lots of discussions in Olympia about raising taxes, closing tax “loopholes” and other creative ways to increase tax revenue.
The state’s technology industries, particularly information and communications technology or ICT for short, are doing quite well overall. The software, web and IT sectors all grew during the economic downturn. From tech titans such as Amazon and Microsoft to mid-sized companies like f5, Isilon and Concur to smaller companies like SEOMoz and Tableau Software, all expanded by hiring engineers, marketers, product developers and the like. In fact, the difficulty of finding top tech talent is the number one pain point for just about everyone in the ICT industries.
The tech industry’s priorities revolve around two key areas: workforce development/higher education and business/tax climate certainty. As stated above, the need for computer scientists and engineers goes unabated. While schools like UW, WSU and WWU do an excellent job of educating those types of folks, the quantity of them is simply too low. The tech industry will again seek to prevent cuts to the higher education budget and push for more computer science and engineering graduates. The marketplace continues to validate that those with science, technology, engineering and mathematics [is that what the acronym stands for?] (“STEM”) degrees get jobs—and usually at good salaries and benefits.
Filling the “pipeline” with qualified students in STEM fields is critical for both Washington and the nation. There is simply no downside in having many more people better educated in math and science. The demand for technology and technology products is not likely to stop anytime soon. Therefore, we will need those who understand technology, can innovate using technology and create new technologies. This is why the tech industry gets involved in improving K-12, especially around math and science standards, curriculum and teaching.
On the business/tax front, the big issue is renewal of tax incentives for research and development (R&D). The state offers a business and occupation tax credit for R&D spending and a sales tax deferral for building R&D facilities. Both of these incentives have been wildly successful, used by hundreds of companies doing R&D in Washington since 1995. Both tax incentives expire Jan. 1, 2015. The ICT and life sciences industries use these incentives extensively to keep R&D costs down, expand new products and markets and remain competitive in a brutally competitive global economic environment.
However, those who desire more tax revenue will gear up their grassroots efforts to prevent renewal of the R&D tax credit. The ICT industries are girding for a battle. The state cannot afford to be less competitive vis a vis Washington’s competitor states. While Washington is clearly a leading tech state, many other states want what we have and are willing to do a lot to get it. There is certainly a case to be made for more tax revenue but getting it at the expense of family wage jobs with good benefits is not worth it.
Now It Comes Down To You
The reality is that the legislature will do its best to satisfy the spending desires across a wide range of constituencies. The other reality is all those desires will not be satisfied due to limited resources. Businesses of all types across every industry will be targeted for higher taxes.
Balancing one interest against the other is what legislators are elected to do. It is not an easy job when there are real consequences and competing interests. Our lawmakers need to hear from you to help them make good decisions. Without citizen input and feedback, legislators rely on the interest groups that help them get elected. Often these are the same groups looking for more tax revenue. Get to know your two state Representatives and state Senator. Write them an email thanking them for serving and letting them know what you are concerned about.
If you would like to dive more deeply into the state’s budget and revenue picture, here are some links for your reference:
Descriptive Statistics on Tax Incentives (Chapters 6 and 11 for high-tech incentives specifically.)