State Legislature Faced with More Difficult Budget Choices – Time for a Tax Increase?

By Lewis McMurran 

Washington’s most recent revenue forecast for the current 2011-13 biennium was lowered once again.  The state legislature uses this quarterly forecast to craft their two year budget, which runs from July 1, 2011 until June 30, 2013.

While we are not technically in a recession as economic growth is in positive territory, the growth of tax revenue is much slower than previous recoveries.  This is occurring despite the hiring spree that the tech and aerospace industries have been on for the last couple years.  The ag/farming and trade sectors are also doing well.  Construction/real estate and auto sales are still slow, which generate high levels of sales tax that Washington relies on as its primary revenue source.  You can read the full text in the Washington State Economic and Revenue Forecast.

The state’s revenue projections are now $1.7 billion lower than the March 2011, on which the 2011-13 budget is based.  This is clearly a significant drop that makes providing government services and education more difficult.  The legislature needed a special session in May to do all the cuts necessary to be in balance.  States generally cannot incur budget deficits the way the federal government can.  The 2011-13 budget currently stands at $32.2 billion.  For comparison purposes, the 2007-09 budget was $32.5 Bil and 2009-11’s was $30.17 Bil.

We can debate the efficacy of state spending on K-12, higher education, health care, social services, correction and environment until we are blue in the face but it doesn’t change the fact the legislature has difficult choices to make.  They should not have ramped up health care and social services when times were good.  They should have put a brake on state employee pension and health care costs and COLAs for retirees years ago.  They should have implemented reforms to K-12 compensation schemes to reward performance over seniority, etc.

But many of these reforms have now been put in place (not yet in K-12) and now we need to move forward.  One of the biggest concerns for the technology industry and for business in general is the continued reduction in state support for higher education.  The colleges and universities have taken real cuts to the point where the state covers only 30% of the cost of attending college.  Tuition has gone up at every institution and it is students and parents who are bearing it.  Washington’s universities are still a good deal overall but for middle and lower income households the burden has increased significantly.

At the same time, young people have gotten the message that getting a 2 or 4 year degree helps them get employed and increases opportunity.  Displaced and laid off workers are seeking retraining at community colleges to update their skills.  This means there is greater demand for higher education than ever before.  But the reduction in state support limits access and will eventually erode quality.  Tuition increases mean that colleges and universities do not have to take as many out of state students to cover their costs.  UW will be experimenting with “differential tuition”.  This means charging more for higher cost degrees.  Engineering and bio-related majors are more expensive due to the cost of labs and equipment.

For businesses and citizens alike the question now is a tax increase of some type acceptable in the face of more budget cuts, especially in higher education.  Gov. Gregoire has proposed a half cent increase in the state portion of the sales tax (from 6.5% to 7.0%) for three years.  You can peruse the governor’s proposal in Revenue Alternatives for Building a Better Future.

A half cent increase in the sales tax “buys back” cuts to K-12 and higher education.  These two areas of the budget are critically important to the state’s future.  While education reform has been painfully slow, there are many signs of improvement in student achievement.  Math and science are getting more focus and attention.  Students have to pass a math test to graduate from high school, with the science requirement coming in 2015.

The advantages of a sales tax increase are that it is spread broadly over the taxpaying public—both businesses and consumers pay it.  It raises substantial money—over $400 million annually. It is also billed as temporary.

At this point, a temporary sales tax increase likely will not kill job creation or be a drag on the economy.  An extra half cent probably won’t stop anyone from buying a car or an appliance if they need it.

But let us also remember that the technology industry had its B&O tax rate increased 20% in 2010, from 1.5% to 1.8% of gross receipts.  This applies to all companies under the “services” category except biotech-related.  This is set to expire in 2013.  The tech industry has also had to absorb the sales tax on digital goods and products that has been difficult for smaller companies to handle.

There is some discussion of curtailing the B&O credit for R&D but no specific proposals have emerged yet.  The bottom line is that the state’s tech-based industries need engineers—aeronautical, electrical, mechanical and software—badly.  The state’s higher education system needs more state support to provide access and maintain quality.  The state’s technology industries are growing and need talent more than anything else.  If a temporary sales tax increase can help with supplying talent to the state’s most dynamic industries, then it may well be worth it.

Lewis McMurran ~ is currently Vice President of Government and External Affairs for Washington Technology Industry Association. He has been with the Washington Technology Industry Association since September of 2000. He is responsible for and directs the Washington Technology Industry Association’s lobbying and advocacy efforts at the local, state and federal level working with elected officials, educational institutions, business and civic associations. Mr. McMurran leads the WTIA’s policy development in conjunction with the WTIA Board of Directors and Government Affairs Group.

*The views expressed in this guest blog post express the views of the guest blogger and not those of Joe Wallin or Davis Wright Tremaine.

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