An overview of the adopted state budget: “sustainability is questionable.”

The Washington Research Council has published a policy brief reviewing the adopted state budget, Legislature Adopts New Taxes to Increase 2019–21 Spending by 18.3 Percent. The headline is also the bottom line, describing major tax increases to support a historically large boost in state spending. The WRC notes the

The policy brief reviews the various tax and expenditure increases in some detail. Here’s the overview:

Appropriations for 2019–21 from funds subject to the outlook and the new workforce education investment account total $52.852 billion (pending gubernatorial action), an 18.3 percent increase over 2017–19. That includes $2.367 billion of spending on new policy. Major new spending items include funding the collective bargaining agreements with state employees and school employee health benefits, as well as increasing spending for higher education institutions and financial aid.

State revenues from existing resources are enough to fund the maintenance level (the cost of continuing current services). To pay for the new policy spending, the Legislature passed several new tax increases. These include business and occupation tax increases on certain businesses in the service and other activities category and on certain financial institutions and graduating the real estate excise tax rate. Notably, the Legislature did not adopt a capital gains tax.

The high level of spending in the maintenance level budget and the likelihood of an economic downturn should have moderated the Legislature’s appetite and led to an increased focus on sustainable budgeting and building reserves. Yet the Legislature increased taxes by more than a billion dollars and much of the new revenue is directed to accounts that are not subject to constitutionally-required transfers to the rainy day fund. The result is a budget that may not be sustainable.

The sustainability challenge, the WRC points out, is also tied to the nature of the taxes increased by lawmakers. The Council’s conclusion:

Given the high level of spending, the overall volatility of the increased taxes, and the calculated avoidance of transfers to the BSA, the sustainability of this budget is questionable. If the newly-passed revenue increases don’t pan outor the economy falters, planned reserves may not be adequate to avoid spending cuts, additional tax increases, or some combination of the two.

The report merits a close reading. We’d also point to Walla Walla Union-Bulletin editorial that suggests, persuasively, that one of the revenue-raisers adopted by lawmakers may not pan out. 

When the state’s Democrat-controlled Legislature took final action to nix the sales tax exemption for Oregonians shopping in Washington, the bulk of lawmakers didn’t see this move — expected to generate $26 million a year in additional revenue — as particularly controversial.

And why would they? Most shoppers in the Puget Sound region, the most populous in Washington, are state residents.

But it’s far different perspective for lawmakers representing areas on the border, such as Walla Walla County, where Oregonians do a sizable amount of shopping. Anecdotally, it appears that perhaps 20 percent of the shoppers are from Oregon at specific businesses in the Walla Walla Valley.

So if those shoppers have to pay the 8.9 percent sales tax (6.5 percent state and 2.4 percent local) they might well opt to shop on their side of the border.

That’s also true for those in the Portland-Vancouver area. Although the out-of-state shoppers can claim a refund for the state portion of the tax if they save their receipts, something the editorial says should be promoted, there’s likely going to be a hit taken by Washington retailers in border counties. Which means, the editorial concludes,

In the end, this effort to claim just under $53 million more revenue for the state in a budget close to $53 billion is a loser for the entire Valley, on both sides of the border.

That revenue gain may not materialize. Taxes affect behavior, after all.

Unanticipated consequences?