Gov. Inslee proposes $54 billion 2019-2021 budget, a 22.3 percent increase. Plan includes a 9 percent capital gains tax.

Gov. Jay Inslee today proposed his 2019-2021 biennial budget. We’ll be brief here.. There will be plenty of time to digest the details. 

Let’s start with four numbers: $54.6; 22.3 and 9 and 2.5. They’re sure to attract a lot of attention.The first is proposed biennial spending; the second is the percentage increase from the current biennium, the third is the proposed capital gains tax rate, and the fourth is the governor’s proposed B&O tax rate for service businesses. 

This graph from the budget office’s highlights document shows how the spending breaks down.

The Seattle Times reports,

Gov. Jay Inslee on Thursday unveiled an expansive 2019-21 budget plan for Washington, funded in part by $3.7 billion in new revenue that includes a proposed capital-gains tax…

…the plan would institute a 9 percent tax on some capital-gains earnings above $25,000 for individuals and $50,000 for households.

Retirement accounts, homes, farms and forestry transactions would be exempt from the tax. About 1.5 percent of Washington’s households would be subject to it.

The tax would raise about $975 million for the next two-year budget, and about $2 billion in future bienniums.

Inslee would also boost the state business-and-occupation tax rate for services, which applies to professionals like attorneys and accountants. That current 1.5 percent tax rate would increase to 2.5 percent, raising another $2.6 billion over two years.

The Washington Research Council further breaks down the spending,

For 2019–21, Gov. Inslee is proposing operating appropriations of $54.634 billion. That’s an increase of $9.973 billion, or 22.3 percent, over 2017–19 appropriations…

The estimated maintenance level, or the cost of continuing current services, is $51.077 billion. This is $324 million higher than the maintenance level projected in the Economic and Revenue Forecast Council’s November outlook. (The maintenance level will continue to be refined into the session.)

One reason for the high maintenance level is that this is the first biennium in which the state’s response to the McCleary decision on school funding is fully funded for the entire biennium.

On top of the maintenance level changes, Gov. Inslee proposes policy additions of $3.557 billion. Some major items include:

  • $404 million for behavioral health care
  • $173 million for a “comprehensive early learning initiative”
  • A return to “Washington’s traditional levy structure”—school districts would be allowed to levy up to 28 percent of their revenues
  • $51 million to fully fund the special education safety net
  • $94 million “to begin phasing in the targeted and enhanced special education funding structure” proposed by the Superintendent of Public Instruction
  • $32.7 million for a career connected learning grant program
  • $103 million for the Washington College Promise Scholarship (previously known as the state need grant)
  • $691 million to fund the collective bargaining agreements with employees (the total cost across all funds appears to be about $1.493 billion)
  • $942 million for school employee health benefits (it looks like $644 million of this is policy level)

This WRC graph makes clear the magnitude of budget growth, with the governor’s proposal included.

It’s an ambitious spending plan, coming on the heels of significant growth and concerns the economy may be slowing. As the ST reports, the capital gains tax has been kicking around Olympia for a while, without ever breaking through.

Republicans have griped about Washington’s expanding budget over the past several years and have strongly resisted a capital-gains tax, calling it unconstitutional and too volatile from one year to the next to be reliable.

Democrats in recent years have sought it and other tax increases in an effort to make Washington’s tax system less regressive.

And, Washington Policy Center writes,

There is no debate on this point – a capital gains tax is an income tax. This according to the IRS, every state revenue department in the country, and just plain common sense.

The governor’s budget represents the opening bid in what’s likely to be an extended legislative negotiation. More later.

Washington Research Council analysis: State spending up 44 percent since 2008, exceeding pre-recession peak

The Washington Research Council has published a new policy brief, “Washington Spending Review: Spending Up 44 Percent Since Pre-Recession Peak,” providing a useful context for evaluating the governor’s budget proposal, which we expect soon. The WRC report complements its earlier analysis of revenue trends

The Research Council finds,

Washington’s state and local spending increased dramatically coming out of theGreat Recession as the state invested primarily in education to address the McCleary education funding lawsuit. With McCleary now in the rear-view mirror, there appears to be an enormous appetite among legislators for new spending on almost everythingelse. As the spending proposals begin to roll out with the governor’s budget, it is instructive to look at the state’s recent spending history.

From the pre-recession peak in 2008 through 2019, spending from funds subject to theoutlook (NGFO) is budgeted to increase 43.9 percent. Washington’s state and local spending per capita has exceeded the national average in most years since 2000 and ranked 15th highest in 2016. From 2016 through 2021 (the end of the second biennium of the current four-year budget window), NGFO spending is projected to increase by 40.3 percent.

NGFO spending on public schools is budgeted to increase by 88.8 percent from 2008 to 2019 (60.5 percent when adjusted for inflation). Public schools spending has also grown as a share of the NGFO budget, from 40.0 percent in 2008 to 52.5 percent in 2019.

Washington increased spending more than most states as it emerged from the recession.

In a time when many states struggled coming out of the Great Recession, Washington’s budget increased significantly. State and local spending per capita has exceeded the national average in most years since 2000.(See Chart 1 on page 2.) In 2016, Washington spending per capita was $9,696 and average U.S. spending per capita was $9,081; Washington ranked 15th in the nation by this measure. 

Washington’s state and local spending as a share of personal income was 18.4 percent in 2016, just below the U.S. average of 18.7 percent. Washington has been below the U.S. average since 2004 by this measure and ranked 30th in the country in 2016. Washington’s state and local spending as a share of personal income ranks lower than per capita spending because its personal income per capita is higher than the national average, ranking ninth highest in the country in 2017  [Citations and footnote omitted.].

Here’s the referenced chart.

A lot of the recent growth, as you might expect, is associated with McCleary school funding compliance, ordered by the state Supreme Court.

Growth in state spending on public schools started to increase faster than other areas in 2014, which marked the beginning of the state funding increases related to the McCleary decision. From 2008 to 2019, total NGFO spending is budgeted to increase by 43.9 percent. Over that time period, NGFO spending on public schools is budgeted to in- crease by 88.8 percent. [Note: NGFO is “near general fund-outlook,” the current term for what most of us consider the state budget. The WRC explains in more detail in the brief.]

We recommend the 6-page brief to your consideration. An important takeaway from the conclusion:

The spending story of the decade hasbeen the state’s response to theMcCleary decision. The related increases in state spending began in 2013–15, but the full impact of the school funding increases won’t be felt until the upcoming 2019–21 biennium. Still, the effort appears to be showing up in the national data: Washington’s state and locals pending per capita was about the same as the national average in 2013, after which Washington’s spending started to outpace the nation.

Legislators will face pressure in the coming session to increase spending for budget areas that have taken a backseat during the McCleary spending ramp-up.

…The recent revenue forecast will tempt legislators too. But an economic downturn looms sometime in the future. After so many years of strong revenues and the spending to match, a cautious approach is warranted.

While caution is nearly always a good idea in fiscal policy, as the WRC points out, it’s particularly important in the coming biennium.

State Treasurer “does not support public banking,” cites higher risk, lower return on investment than private banking.

State Treasure Duane Davidson has released a “study of the studies” of state, municipal, and other public banks. His takeaway:

“The Office of the State Treasurer supports building upon Washington’s existing structure of banking and does not support public banking because of the higher risk and lower return on investment compared to the current private banking system.”

The report is presented as a series of slides. It’s a thorough review, one that strongly supports Davidson’s conclusion. We’ll not go into detail here; the study is clear and accessible.

In some respects, this may seem like an arcane review of a policy objective that has gained little traction in Washington. The treasurer’s report finds,

Not many state banks exist today for a number of reasons. Here are some examples:

• Bank of North Dakota – Established in 1919, and operates with one office in Bismarck, North Dakota. It was originally established to help area farmers have access to banks when private banks were too few in the area.

• Puerto Rico Development Bank (FAILED) – It was established 1942 and liquidated in the Summer of 2017.

• Delaware Farm Bank – The state owned 49 percent of the bank from 1800s to 1975. In 1976, the state increased ownership to 80 percent. On verge of failure in 1981, it
was purchased by a private Pennsylvania Bank.

• American Samoa – This unincorporated territory of the United States has a state bank that opened its doors in 2016.

END NOTE: Only two of these public banks still exist today.

Yet, the report serves a timely purpose. In 2017, a state bank study was included in the budget.

A proviso that was included in the state operating budget and was proposed by Sen. Bob Hasegawa, D-Seattle, funds an interim task force to look at creating a publicly-owned state bank, and make recommendations for the 2018 Legislature to take action on.

“With the state bank, we would keep our tax dollars in Washington and working for the people of Washington, not Wall Street,” Hasegawa said. “A state bank could provide huge financing capacity to fund critical infrastructure like clean water systems, schools and roads, without having to sell bonds through Wall Street brokers. We simply don’t have enough money to keep going into debt to Wall Street to fund the infrastructure that every Washingtonian relies on.”

The final report of the task force, released in December 2017 showed the group failed to reach consensus.

Task Force members had many opinions regarding the helpfulness of establishing a depository institution for infrastructure funding. Some members thought that numerous studies have already been conducted in other states – and the variety of issues raised in these studies has resulted in no state depository institutions being established since the Bank of North Dakota a century ago.

Some other Task Force members are supportive of doing additional study about establishing a state- owned depository institution but acknowledge that this study would need professional experts to be hired.

If the Legislature does want to further consider the issues surrounding the establishment of a state depository institution, much more work needs to be done. Topics that would need to be addressed include the legality/constitutionality, capitalization, governance, business plan, structure, and level of interest/need for such an institution from local governments.

Michael Waite, who lost the treasurer’s race to Davidson in 2016, had a January 1, 2017 op-ed in the Seattle Times arguing against public banks. At that time, the focus was a Seattle city bank. He wrote,

Recently, two members of the Seattle Public Banking Coalition sent a letter to the City Council suggesting that the city should create its own bank, rather than utilize existing private-sector institutions for banking. Such a public-finance approach is a concept that has also been pushed at the state level by such officials as Sen. Bob Hasegawa, D-Seattle…

His argument addresses some of the same concerns raised in the study of studies: potential conflicts of interest, administrative mistakes, and bad debts. 

It’s not clear that the state bank will again appear on the 2019 legislative agenda. If it should, Treasurer Davidson’s report should be a must-read for lawmakers.

Tax Foundation: Washington imposes 3rd highest cell phone taxes in the nations.

The Tax Foundation reports that Washington imposes the third highest cell phone taxes in the nation, behind just Illinois and Alaska.

  • A typical American household with four wireless phones paying $100 per month for taxable wireless service can expect to pay about $229 per year in wireless taxes, fees, and surcharges—up from $221 in 2017.

  • Nationally, these impositions make up about 19.1 percent of the average customer’s bill—the highest rate ever. Illinois now has the highest wireless taxes in the country at 27.6%, followed by Alaska at 26.1%, Washington at 26.1%, Nebraska at 25.5%, and New York at 25.2%.

Coming in No. 3 is actually a bit of an improvement; Washington used to top the list. No, you didn’t miss a tax cut. The top two got more aggressive. 

In 2018, due to a large increase in 911 fees in Chicago and statewide, Illinois surpassed Washington state with the highest wireless tax rates in the country at 27.55%, followed by Alaska at 26.13%. Alaska’s state universal service fund surcharge has increased dramatically in the last few years, vaulting Alaska into its position as the second highest wireless tax state. Just two years ago, Alaska was not even in the top 10.

Tax policy discussion continue to come to the forefront in our state. What often gets overlooked in the broad brush debate is the affect of selective, targeted sales taxes: tobacco, alcohol, soda, etc. And, surely, there are those who place talking on cell phones in the sin tax category (particularly on buses and in restaurants). The Tax Foundation notes the broad policy argument:

One of the longstanding arguments for reform of wireless taxation is the disparity in tax burdens on wireless as compared to broad-based consumption taxes imposed on other goods and taxable services subject to sales and use taxes. Wireless and other telecommunications are one of the few services that are consistently subject to sales and use taxes by states with both narrow and broad sales tax bases. Furthermore, states like Delaware, Montana, and New Hampshire that do not impose a sales tax have specific taxes on wireless and other communications services.

TF includes a table (click through to the study for more detail) that ” ranks the states by comparing the disparity between the tax rates imposed on wireless service to the combined state and local sales tax rate in each state.” Washington, with a relatively high overall sales tax rate, nonetheless comes in near the top of the disparity rankings.

Alaska leads all states in this regard, imposing wireless taxes that are nearly eight times higher than average sales tax rates—19.5% vs 2.5%. Other states with large disparities include Nebraska, Illinois, New York, Washington, and Pennsylvania.

Why does it matter?

Wireless consumers continue to be burdened with higher taxes, fees, and surcharges in many states and localities across the United States. With state and local governments continuing to face revenue challenges, the wireless industry and its customers continue to be an attractive target for raising new revenues. Excessive taxes on wireless consumers disproportionately impacts poorer families and may have ramifications for long-term state economic development and growth. Higher taxes on wireless service, coupled with increased taxes on wireless investments, may lead to slower deployment of wireless network infrastructure, including fourth and fifth generation (“4G” and “5G”) wireless broadband technologies—a key element to the future success of Smart Cities.

An interesting analysis.

Governor proposes clean energy agenda for 2019. It does not include a carbon tax.

Gov. Jay Inslee laid out his clean energy proposals for 2019 yesterday. From the press release:

Gov. Jay Inslee was joined today by Democratic legislators and climate action supporters to unveil a plan that would launch a dramatic reduction of Washington state’s greenhouse gas emissions over the next 15 years.

The proposal would accelerate the innovation and efforts already underway across the economy to transition to 100% clean energy, construct ultra-efficient buildings, establish a clean fuel standard, electrify the state’s transportation system and phase down super-pollutants in certain products. Combined, the policies would reduce greenhouse gas emissions in Washington state to 25 percent below 1990 levels by 2035.

“We know what it will take to combat climate change and we should be confident in our ability to invent, create and build the technologies that will lead us to a healthier and more secure carbon-free future,” Inslee said. “Washingtonians are ready to see their elected leaders step up to prevent further harm to our forests, our air and our communities. These are enormous steps forward in our effort to save our state and our planet.”

Seattle Times reporter Jim Brunner writes,

The new slate of proposals does not include a carbon tax or fee to raise the cost of fossil fuels — a policy Inslee has strongly backed but which has met with rejection from the Legislature and voters.

Included are:

Other proposals in Inslee’s legislative package include phasing out “super-pollutant” hydrofluorocarbons used in air conditioning, a clean-fuels standard targeting auto emissions, incentives for electric vehicles, and increased energy-efficiency regulations for buildings.

In all, the proposals would include $268 million in spending in the 2019-21 state budget, according to a summary of the agenda distributed by the governor’s office. Among the largest expenses would be $53 million to convert two state ferries to electric hybrids and $64 million to build two new electric ferries.

The Association of Washington Business writes,

A centerpiece of the governor’s plan is to require utilities to eliminate the use of fossil fuels such as coal or natural gas from electricity sources by 2045. Another part of the plan would implement a clean fuel standard, like that already in place in California. Fuel providers would be required to lower the carbon intensity of fuels by 10 percent over the next decade, and by a total of 20 percent by 2030.

From The Lens:

“This is not a future fantasy,” Inslee said. “This is a today reality in the state of Washington.”

Noticeably absent from the list of proposals is a tax or fee based on carbon emissions, though when asked about it during the press conference, he told reporters: “we’re not giving up on anything. I’m not ruling out anything else in the next decade or so.”

He added that “the people decided not to embrace Plan A (I-1631), but there’s about 400 other plans behind that ready to go.”

Lens reporter TJ Martinell adds,

A likely debate over these measures next year is how much they’ll affect state residents in the form of higher energy prices or products due to increased transportation costs. The Association of Washington Business (AWB) advocates that “cost impacts resulting from carbon regulation should be transparent at the point of sale to end-use consumers.”

When asked about the costs at the press conference, Inslee replied that “the choice is between inaction and action. The costs of inaction are enormous.”

Geek Wire also provides a detailed report on the governor’s proposals, including responses from legislators.

“Washington State didn’t become home to some of the great companies on this planet by accident,” said State Senator Reuven Carlyle, a Democrat whose Seattle district includes Amazon’s headquarters. “We had a sense of intentionality about our quality of life and we have that same sense of intentionality now as we think about the next generation of a clean economy.”…

While the proposal was light on specifics about possible costs to consumers — a major sticking point in the carbon tax — Carlyle was adamant about voter support for the upcoming legislation.

“For the people of Washington state, climate change is not an academic theory, a white paper, or a nebulous concept,” he said. “It’s a real, tangible concept: It’s about orcas, salmon, forests, water quality, shellfish, soil quality, and everything that’s real to real people living real lives. It’s real, it’s authentic, it’s happening, and people want meaningful action.”

This week will see other major legislative proposals from the governor, including a budget rollout anticipated on Thursday.

Promoting postsecondary education and training; creating the skilled workforce needed to satisfy growing demand.

The Seattle Times editorial board is calling for increased funding for community and technical colleges

Today’s young people will need a college degree or at least some post-high school training to qualify for the good paying career jobs of the future, from airplane manufacturing to software engineering. Much of that training will happen at the state’s 34 community and technical colleges, which currently educate about 370,000 students.

They cite three funding priorities.

The Washington State Board for Community and Technical Colleges has three asks for the Legislature, all aimed at improving college completion. They want faculty pay raises to bring them in line with K-12 public school teachers; expansion statewide of the Guided Pathways student support program; and 5,000 more student slots in high demand fields like nursing, computer science and advanced manufacturing.

When weighed against the positive outcomes, the request is logical and relatively modest, totaling $189 million.

We wrote about the Guided Pathways program last week.

In the Wenatchee World, columnist Kelli Scott digs deeper into issues raised by a guest column from North Central Washington educators. (We liked to that column here.) Scott writes,

While the bulk of the 740,000 jobs that will open in Washington state by 2021 will require education beyond high school — a bachelor’s degree, an associate’s degree, an industry certificate or an apprenticeship — just 37 percent of high school graduates in this part of the state will get such a credential by the time they are 26, the column informed us.

The reality is even more grim for students of color. Just 24 percent of Latino students from North Central Washington in the class of 2015 completed education or training after high school.

Our economy demands more. If we don’t find a way to get more of our kids into some form of education after high school, local employers will be forced to import skilled employees from out of the state or out of the country. And this is not happening in some distant future.

She cites cost concerns. 

So, why aren’t more students continuing their education after the twelfth grade? For many, it’s a money issue, Dr. Gene Sharratt told me. He’s one of the authors of the column, the past executive director for the Washington Student Achievement Council, and is currently pushing for expanded access to higher education with the advocacy group College Promise Coalition.

…To get over the cost obstacle and get more kids into college and certification programs, Sharratt and his College Promise Coalition lobby for increased financial aid funding for programs like the State Need Grant (SNG). There are currently 18,000 students who qualify for financial help through the program but receive none because the funds just aren’t there. One of the College Promise Coalition’s goals for the upcoming legislative session is fully funding the SNG.

There’s little question that the jobs are there. The Associated Press reports,

The number of open jobs rose in October to the second-highest on record, evidence that U.S. employers remain determined to hire despite ongoing trade disputes and rocky financial markets.

The National Association of Manufacturers says of that report,

New data out this morning from the Labor Department underlines the severity of the workforce crisis facing manufacturers as job openings in the manufacturing sector jumped to a new all-time high of 522,000 (this October data is up from 485,000 in September). Durable goods firms reported the most job postings in October (332,000) since January 2001, with openings for nondurable goods manufacturers (189,000) also higher for the month. In addition, there were 384,000 hires in October, with 345,000 separations (which include quits, layoffs and retirements). As a result, there was net hiring of 39,000 workers in the manufacturing sector in October, the fastest pace in 14 months.

While the manufacturing sector is doing very well overall—as evidenced by the high optimism levels recorded in recent NAM Manufacturers’ Outlook Surveys—the sector also continues to consistently report strong levels of concerns about the difficulties in finding enough skilled workers in the very same surveys. This workforce challenge threatens the future of the industry if left unsolved, which is why so many are working so hard to solve it.

Increased access to affordable, relevant postsecondary education is part of the solution.

Washington Research Council publishes a new comparative analysis of Washington taxes. A useful, timely policy guide.

With tax policy certain to be on the 2019 legislative agenda, a new policy brief from the Washington Research Council should provide valuable perspective to lawmakers. The brief examines Washington’s tax structure, comparing it to the US average, and traces revenue growth, tax burden, and personal income to provide insight. Perhaps surprisingly, the WRC finds,

Washington’s tax structure is unusual,but it yields revenues that are similar to other states by multiple metrics…

Despite its lack of an income tax, Washington’s state and local taxes per capitahave largely tracked the national average (see Chart 3 on page 2). In 2016 (the most recent data available), Washing-ton’s state and local taxes per capita were $5,050, above the national average of $4,946. By this measure, Washington ranked 17th in the nation.

As a share of personal income, Washington’s state and local taxes rank near the middle of the pack at 28th among the states. Washington’s rank is lower by this measure than per capita because its personal income per capita is consistently higher than the national average. In 2017, Washington ranked ninth highest in the country in personal income per capita. [Citations omitted.]

Here’s the chart mentioned above.

The Council also cites a Pew research report finding Washington’s tax system is the 14th least volatile in the nation and notes that the increase in the state property tax levy will add to the system’s stability.

As we’ve reported, state revenue growth has been strong in recent years. The WRC brief provides additional context.

Washington’s recent revenue growth hasbeen strong by national standards. In-deed, Washington’s state and local tax growth from 2015 to 2016 was the nation’s highest.

Similarly, state revenue growth in Wash- ington has outpaced the nation since 2015, and it ranked 10th highest among the states in 2017.  Other states have not per- formed as well. Adjusted for inflation, revenues in 16 states have still not recovered to their pre-recession peaks . [Citations omitted.]

Yet, the WRC includes a warning.

The November revenue forecast gave some reasons to be cautious about the future. Revenue Act taxes (retail sales and use, B&O, public utility, and non- cigarette tobacco products taxes), which make up about 75 percent of the state’s revenue sources, were revised down- ward; personal income is growing slower than in recent years; and real estate excise taxes are “assumed to have reached a near-term peak in the first quarter of2018.”

…Legislators should not expect that recent exceptional revenue growth will continue forever and should plan accordingly.

Good advice. And a good – and timely – overview of the state tax structure. 

Productivity, employment and wages still growing. Lack of qualified workers “most important” problem, says NFIB.

Aside from the stock market (about which nothing will be said) the economic news is mostly good, with the ongoing trade war caveat

U.S. productivity is up, reports AP.

U.S. productivity grew at an annual rate of 2.3% in the July-September quarter, slower than the previous quarter but still an improvement over the weak annual gains of the past decade. Labor costs rose at a modest pace in the third quarter.

So is employment.

U.S. businesses hired new workers at a solid pace in November, adding 179,000 jobs, according to a private survey.

The report comes as other data also suggest the U.S. economy remains healthy, even as the financial markets have gyrated over concerns about a trade conflict with China and slowing global growth.

Payroll processor ADP said Thursday that last month’s job gains slowed from October’s strong showing of 225,000. Still, November’s hiring is enough to lower the unemployment rate over time.

Service firms continue to expand.

U.S. services firms grew at a slightly stronger pace in November, a sign that the recent stock market sell-offs have yet to dampen enthusiasm among consumers.

The Institute for Supply Management, which is composed of purchasing managers, reports that its services index rose to 60.7 last month, up from 60.3 in October. Readings above 50 point to further expansion Services companies have been expanding for 106 months, or almost nine years.

And small businesses continue hiring in a tight labor market, according to NFIB’s latest survey.

Small business job creation inched up in November, rising to a net addition of 0.19 workers per firm, according to NFIB’s monthly jobs report, released today. Sixteen percent of owners reported increasing employment an average of 2.9 workers per firm, unchanged from October, and 11 percent reported reducing employment an average of 1.9 workers per firm.

The tight labor market is driving up wages, reports the Wall Street Journal.

Proving once again that incentives matter, today’s NFIB survey will also show that company owners struggling to find new talent are responding in exactly the way one would expect. Says [NFIB Chief Economist Bill] Dunkelberg:

The percent of business owners reporting that they increased employee compensation continued at 45 year record high levels… A net 34 percent reported higher compensation in November and a net 25 percent planned increases in the next few months, predicting even more gains in wages and benefits.

Yet, the lack of qualified workers presents a major challenge to employers and a threat to the expansion. From the NFIB jobs report.

“The labor force is not growing quickly enough to satisfy the current demand for workers,” said NFIB Chief Economist Bill Dunkelberg. “A successful hire in this market will likely create a job vacancy elsewhere because of the tight labor market. The unemployment rate will likely go lower since the labor demand is still more than the increases in labor supply.”

That makes programs that accelerate skill development, especially those that lead to a postsecondary credential, so vital to our economic future.