As revenues recover, budget caution advised. More evidence supporting Washington’s 4-year balanced budget requirement?

A new Stateline report on the health of state budgets suggests that the recent recovery in state revenues won’t lead to significant new spending. Some themes will be familiar to those who follow this state’s fiscal discussions.

Most state budgets are nicely in the black, but predictions of weak economic growth are leading states to spend cautiously or to stockpile funds. And in the half-dozen states with red ink, lawmakers increasingly are looking to hike sales taxes, although they could be a weak source of revenue.

Many forecasters are predicting an economic downturn in the next couple of years, which has made many states reluctant to commit to big, expensive programs — even if they have a surplus. Recent volatility and losses in the stock market foreshadow less income tax revenue. And the trend in sales tax receipts is weakening, as consumers turn to untaxed Internet sales and cautious buying habits.

That stock market volatility may also concern supporters of a state capital gains tax, which notably swings with market fluctuations. 

By statute, the Washington Legislature must adopt a four-year balanced budget. As the Washington Research Council wrote in 2012, 

Under SSB 6636 (signed by the governor May 2), beginning with the 2013–15 biennium (which starts July 1, 2013), the legislature will have to “enact a balanced omnibus operating appropriations bill that leaves, in total, a positive ending fund balance in the general fund and related funds.” Additionally, “the projected maintenance level of the omnibus appropriations bill enacted by the legislature shall not exceed the available fiscal resources for the next ensuing fiscal biennium.” The bill also requires regular budget outlooks to illustrate what the future may look like under current law.

The WRC wrote yesterday that the governor’s proposed supplemental budget does not balance over four years

The Economic and Revenue Forecast Council has released its four-year budget outlook based on Gov. Inslee’s proposed 2016 supplemental operating budget. (We wrote about his proposal here.) The outlook shows that although the unrestricted ending fund balance in 2015-17 is positive ($264 million), the unrestricted ending fund balance in 2017-19 is negative $714 million. 

We should mention here that the WRC just released a policy brief on the governor’s teacher compensation proposal, “Gov. Inslee’s Teacher Shortage Proposal: Good Policy, Bad Timing?” 

The Stateline report provides some longer-term perspective on state budgets.

Before the Great Recession that began in 2007, state revenue increased an average of 5.5 percent a year, said Scott Pattison, executive director of the NGA.

“In the recovery years, you are lucky to see a growth rate of over 4 percent,” he said. “That is forecast to continue.”

For a more detailed discussion of state revenue systems and their recent performance see this report from the Rockefeller Institute. 

While Washington’s economy is relatively robust among the 50 states, the state is well-served by the requirement to take the long view on balanced budgets. The four-year statutory requirement provides for an additional measure of stability in fiscal planning. And, of course, state policies that promote economic vitality will also support sustainable revenue growth.