Some good news about Washington’s tax system, as reported in The Lens.
Washington benefits from one of the more stable revenue streams in the nation, and the best among the West Coast states. That’s according to a new study by the Tax Policy Center that examined all 50 state budgets and revenue over an 11-year period.
The absence of progressive income taxes and capital gains taxes helps mitigate volatility.
Between 2005-2016, Washington and nine other states’ revenue streams had a 4.4-5.5 standard deviation in percent change. That’s less than Oregon, which had a 5.5-6.5 standard deviation change, and half of California’s 8.5+ standard deviation.
Both those states have income taxes and a capital gains income tax, which Washington Research Council (WRC) Research Director and Senior Economist Dr. Kriss Sjoblom says provokes greater revenue volatility. “Most of them (capital gains) apply to the top slice of the taxpayers, and they’re taxed at a higher rate than everyone. The progressivity accentuates the volatility of an income tax. It’s very hard to forecast capital gains, because you have to forecast the stock market, and you know how poorly people are at forecasting the stock market.”
Another positive feature of Washington fiscal policy is the balanced budget requirement. Again, from The Lens:
…stability is critical not only for accurate [revenue forecasts], but also for state lawmakers whose purse strings are tightened or loosened based on those estimates as part of the Balanced Budget Requirement (BBR). That fiscal stipulation was first implemented during the 2013-15 biennium, by restricting budgeted state spending to four-year revenue forecasts.
The state’s budgeting practices have helped Washington maintain high credit ratings. According to the latest reports, Fitch gave Washington a rating of AA+ with a stable outlook, Moody’s rated Washington an Aa1 with a stable outlook and Standard & Poor rated the state an AA+ with a stable outlook.
As The Lens reports, the BBR has legislative critics.
…some lawmakers say the continued surplus revenue causes the BBR to artificially restrict state spending. With a power transition in the Senate, its future role could be up in the air.
Sjoblom says the BBR helps prevent the state from spending based on assumed growth that doesn’t materialize.
It’s good fiscal policy, which works well in tandem with a budget stabilization fund (BSF). Among the Tax Policy Center’s recommendations,
Focus on sustainable systems
» Pair strict BBRs with robust BSFs, which can soften volatility without undermining the beneficial effects of strict antideficit rules.
» Reform or eliminate TELs that prevent either saving during good times or raising revenues during economic downturns.
» Be transparent about pension liabilities and tax expenditures, redesign debt limits to discourage shifting to nonguaranteed forms of debt, and practice current service budgeting.
Focus on design
» Adopt stricter automatic contribution requirements for BSFs, based on the volatility of each state’s unique revenue streams.
» Partner with the research community to invest in additional research on best design practices.
Washington has benefitted from sound budgeting in recent years, a practice enhanced by the four-year balanced budget requirement and the rainy day BSF. It would be a mistake to weaken either of them now.