Research Council releases analysis of governor’s “historically large” budget proposal, identifies concerns.

The Washington Research Council has published its analysis of Gov. Jay Inslee’s proposed 2019-2021 budget. In sum,

Gov. Inslee has proposed a historically large 2019–21 operating budget that would increase spending from funds subject to the outlook (NGFO) by $9.973 billion (22.3 percent). Of that spending, $6.415 billion is the cost of continuing current services and completing implementation of the K–12 spending required by the state SupremeCourt’s McCleary decision. Current resources are enough to fund that maintenancelevel.

The governor proposes $3.557 billion in new policy changes. These include funding collective bargaining agreements reached with state employees, increasing allocations for school support staff, altering limits on local levies, implementing a new special education funding structure, and increasing funding for state hospitals and homelessness programs.

To help fund the $54.634 billion spending proposal, Gov. Inslee proposes a tax package that would increase revenues by $3.689 billion. If enacted, 2019–21 revenues would increase by 17.2 percent over 2017–19. (Current revenues are already expected to increase by 9.2 percent.) The package includes a 9 percent capital gains tax and a 67 percent increase to the business and occupation tax on services.

The proposal would leave $2.789 billion in total reserves at the end of the biennium, and it would balance over four years. However, the budget would dedicate $2.090 billion of the new revenues to the education legacy trust account, thereby avoiding an extraordinary revenue growth deposit to the rainy day reserve fund. The high level of spending along with this revenue diversion make the sustainability of the proposal questionable. But this represents just an opening bid: Typically, the Legislature appropriates less than the governor proposes, and legislators have indicated that thetax package as proposed probably won’t be enacted.

The 8-page analysis is worth reading in full, as it provides detail that will be useful in following the coming budget debate. The Council points out,

This isn’t the first time Gov. Inslee hasproposed a very large tax package. He has done so in each of his biennial budg- et proposals, but his tax packages have been the high-water mark compared to subsequent legislative revenue proposals…

With significant increases in previous biennia and the likelihood of an economic downturn sometime in the future, we previously recommended a cautious approach to the 2019–21 spending level.

We’d like to call particular attention to three concerns the WRC identifies:

First, the governor would completely reject theLegislature’s recent work to limit local school levies and return to the system that spawned the McCleary lawsuit. Doing so could put the state on a path to the next McCleary…

Second, as part of the 2018 supplemental budget, the Legislature set the precedent of unsustainably diverting revenues from the GFS to the ELTA in order to avoid a constitutionally-required deposit to the BSA (WRC 2018a). Gov. Inslee proposes a similar diversion, which allows his budget proposal to balance. While a balanced budget is important for sustainability, so is the discipline of the constitutionally-required deposits to the budget stabilization account. A sustainable budget should balance without the need for such a maneuver.

Third, a capital gains tax would present other budget sustainability problems. If enacted by the Legislature, it would surely be challenged in court as an income tax—and that would take time. It is not assured the state would ever collect any capital gains revenues, least of all in the upcoming biennium. Additionally, capital gains taxes are highly volatile, and as the governor’s budget documents note, fluctuations in capital gains revnues could be managed with “careful budgeting.” This would require even more emphasis on increasing reserves, something neither the governor nor the Legislature has prioritized.

The Seattle Times editorial board shares the WRC concern with the sustainability of the Legislature’s McCleary solution.

After six years and billions of new dollars invested in K-12 education, the governor, the superintendent of public instruction, Seattle Public Schools and some state lawmakers seem to have forgotten the essence of the landmark McCleary ruling. They are poised to open a door that would allow a return to an unevenly funded school system that shortchanged too many students.

Proposals from Gov. Jay Inslee and Superintendent of Public Instruction Chris Reykdal would allow property-rich school districts to tap their affluent voters to increase their school funding way beyond the limits set by the Legislature in response to the 2012 McCleary ruling. They would raise the new 12 percent local levy limit to 28 percent and 22 percent respectively. That would be on top of the state property tax increases levied mostly on more affluent districts, with the understanding local levies would be reduced.

Stop right there. Those levy proposals would put Washington back on the path toward woefully inequitable school funding. And probably another school funding lawsuit.

Sound words of caution from the Washington Research Council and the Seattle Times.