Research Council asks, “How should the state spend its substantial surplus?” And offers some recommendations.

With the governor’s budget set to be delivered this week, the Washington Research Council is out with a timely policy brief, “How Should the State Spend Its Substantial Surplus?” The WRC reviews the state’s cushy fiscal position and provides recommendations for how lawmakers should approach spending the surplus. 

There’s a lot of money on the table.

When the 2021–23 operating budget was enacted, it left an unrestricted ending balance for funds subject to the out- look (NGFO) of $83 million in 2023–25. With ever improving revenue forecasts and new, lower spending assumptions, we estimate that the unrestricted NGFO ending balance is now $8.649 billion. Additionally, the budget stabilization account (BSA, or the rainy day fund) ending balance is estimated to be $1.207 billion in 2023–25 and the new shadow reserve account holds $1 billion.

Heading into session, the surplus as a percentage of revenues is the highest it has been going back at least 20 years. Our estimated surplus of $8.649 billion for 2023–25 is 13.5% of revenues. The next highest surplus was 5.5% in Nov. 2005.

The Council identifies four principles that should guide budget deliberations.

There are several ways the state could use its surplus while maintaining budget sustainability. In doing so, legislators should follow these general principles:

  • Restore reserves so that the state is ready for the next downturn.

  • Do not use one-time funds for ongoing projects. (For example, the state could fund culvert fixes.)

  • Focus on sustainably funding programs and projects that are already planned. (For example, the state could improve funding of state retirement systems, dedicate sales tax collections from vehicle purchases to transportation accounts, or better plan for the cost of the state’s new child care program.)

  • Consider whether the current level of taxation is higher than necessary to support state spending. (For example, the state could reduce unemployment insurance taxes, add a property tax homestead exemption, reduce the sales tax, or repeal the capital gains tax.)

We recommend the 7-page brief, which analyzes the surplus and explores how the principles could be applied. Here, for example, is part of the tax relief discussion.

Relief could be temporary or permanent, targeted or broad.

One option would be to reduce unemployment insurance (UI) taxes by shoring up the UI trust account. The trust fund balance as of Dec. 31, 2019 was $4.778 billion. At the end of CY 2021, it is estimated to be $1.791 billion (UIAC 2021). As we discussed in a policy brief this year, employer UI taxes automati- cally increase when the trust fund balance is insufficient to cover seven months of benefits and when benefits paid exceed revenues received (WRC 2021a). Legislation adopted in 2021 (ESSB 5061 and ESSB 5478) reduced UI taxes, but average UI tax rates are still expected to increase to 1.45% in CY 2022 (up from 1.08% in CY 2019). The Legislature could use surplus funds to increase the trust fund and (via leg- islation) reduce the tax rates further.

More broadly, the state could provide a homestead exemption for the state property tax or cut the sales tax. In 2021, SB 5463 would have exempted $250,000 of the assessed value of a principal resi- dence from the state property tax. (Such a policy would require a constitutional amendment.) The fiscal note estimated it would reduce state revenues by $2.402 billion in 2023–25. Meanwhile, the Depart- ment of Revenue estimates that an increase to the state sales tax of 0.1% would increase state reve- nues by $305 million in 2021–23, implying that a reduction of 0.1% would reduce revenues by about $300 million (DOR 2021).

Finally, the state could consider repealing the capital gains tax.

There’s more. The WRC’s concluding comment is spot on:

Washington’s estimated unrestricted surplus of $8.649 billion, both in absolute terms and as a percent

age of revenue, is higher than it’s been in at least 20 years. On top of that, the state has $2.207 billion in reserves and still has federal relief funds to spend. There will be many claims on this money during the session, but caution is warranted. Although revenues are expected to continue to increase, lawmakers should not create spending bow waves that can’t be sustained in the future.

Given the current economic uncertainty, the surplus should not be used to begin new obligations and one-time funds should not be used for ongoing projects. Instead, the state should restore reserves, focus on sustainably funding programs that are already planned, and consider whether the current tax burden is higher than necessary to support state spending.