WashACE Analysis: Washington State Economy is Stronger, But Projected State Spending Will Exceed Available Revenues for Foreseeable Future.

SEATTLE -- The level of spending required to maintain current Washington state services will exceed available state revenues for the foreseeable future. That is the conclusion of a newly released Competitiveness Brief, "Building a Budget for Long-Term Stability," from the Washington Alliance for a Competitive Economy (WashACE).

"Even with a recovering economy, persistent and significant budget shortfalls continue to plague our state. The reason is simple: we're spending faster than the economy and revenue system is growing. Until spending is reigned in, the budget cannot be sustained," said Richard Davis, president of the Washington Research Council, a WashACE partner.

In large part, Washington's struggle with deficits is the result of short-term budget fixes during previous budget cycles. For example, lawmakers used a combination of tax increases, program reductions, fund transfers and reserve spending to plug a $1.5 billion shortfall for 2005-07. This only postpones the pain. Even with a strong June 2005 revenue forecast and revisited inflation estimates, a projected $600 million shortfall is expected in 2007-09.

Tax cuts in the late 1990s, the expansion of Medicaid eligibility and general fund spending increases contributed to the structural nature of the state's deficit. Mixed messages from voters exacerbated the problem. For example, voters drastically cut revenues with approval of Initiative 695 in 1999. Just one year later, they mandated increased spending -- without an attached revenue source -- via a pair of education initiatives (I-728 and I-732).

The state's heavy reliance on business taxes contributes to the problem as well. Washington raises an extraordinarily high share of state and local revenue from businesses. This limits the ability of policymakers to correct structural deficits through tax increases due to the negative impact on job creation and state competitiveness.

"Washington's tax system relies heavily on business and is punitive to expanding and startup operations. Increasing state revenues generally means increasing either the Business and Occupation or sales taxes. Those taxes have nothing to do with profitability and clobber employers during economic downturns," said Don Brunell, Association of Washington Business president and WashACE partner.

The WashACE analysis concludes that lawmakers must combine the discipline of the Priorities of Government budget process -- introduced by Governor Locke in 2003 -- with a tax and expenditure limitation. Substantial revenue increases cannot be justified nor implemented successfully. A failure to address the structural deficit has the potential to slow the pace of the economic recovery.

"We are in a recovery now, but continued growth is far from guaranteed. We must prepare for an unpredictable future. That means reigning in spending increases, protecting state reserve accounts and staying focused on priorities-based budgeting," said Steve Mullin, Washington Roundtable president and WashACE partner.

The WashACE Competitiveness Brief is available at www.researchcouncil.org.

About WashACE

The Washington Alliance for a Competitive Economy is a nonprofit research institute focused on improving the state's economy and business climate. It was founded in 2000 by the Association of Washington Business, the Washington Roundtable and the Washington Research Council. Its first report, released in October 2000, served as the starting document for the Washington Competitiveness Council formed by Gov. Gary Locke in 2001.