In an op-ed, Ruth Kage, a former state representative from Seattle, urges legislators to emphasize tax increases over budget cuts to address the state’s nearly $9 billion projected revenue loss over the next four years. She writes that the state’s fiscal restraint during the Great Recession delayed Washington’s recovery.
A report published by the Center for American Progress four years after the 2008 crash found that the 20 states that pursued austerity and budget cuts — including Washington — were doing measurably worse than states that increased spending during the recession. In states that increased spending, unemployment was lower, and their economies were growing faster than prerecession. In austerity states like Washington, the economy was still growing at a slower rate than it had been before 2008.
Other evidence suggests the CAP analysis may have been premature. For example, Pew Research takes a longer term look at the recovery. Reporting on the Pew analysis, U.S. News writes,
STATE TAX COLLECTIONS have fully recovered from their recession-era swoons in all but five states across the country, according to a new Pew Charitable Trusts report that suggests most states are seeing tax gains in the wake of the longest-running economic recovery in U.S. history.
A group of mostly Western and Midwestern states leads the nation in post-recession tax revenue recovery, with revenue growth in North Dakota up 71.2%. Oregon, Colorado, Washington and California round out the top five, each enjoying revenue growth of at least 30% from their recession-era peaks.
Toss out North Dakota because of its energy resources and small economic base and Washington looks very strong. Here’s Pew’s long look at revenue growth, comparing Washington with the U.S.
We’ll concede that if your response to a downturn in the recovery is to raise taxes, well, tax revenues will rise in the short term. But if a long-term strong recovery is your goal, perhaps it’s better not to impose new costs on businesses and households struggling in the depressed economy.
Let’s look at another Pew chart, showing Washington among the top job-creating states since the recession, and the largest state among the leaders.
Previously, we cited the Washington Research Council’s analysis of how Washington successfully addressed budgeting during the Great Recession. It’s worth remembering the lesson on tax policy. The WRC points out that tax increases made up just 11.9 percent of the state’s response. The lesson:
Don’t lead with tax increases. Tax increases were a minimal part of the Great Recession response. Even if the Legislature could agree to increase taxes, in cases like a capital gains tax the revenues might not be collectible for some time, making them unhelpful in the near term. (Moreover, the part of the tax response to the Great Recession that brought in the most revenue was an increase in the B&O tax surcharge on service businesses. The Legislature has already gone to that well this year, for the workforce education investment account.)
Current legislators are also looking at tax hikes as a way to handle the shortfall, taking as their model the Seattle payroll tax, the Association of Washington Business reports.
…Sen. Reuven Carlyle, D-Seattle, suggested expanding it to a statewide version of the tax. Carlyle tweeted, “With the #waleg facing a $8.8B deficit, a state-level payroll tax is a viable, measured, progressive option to help protect vital services & balance the budget. A city tax is the wrong level of gov’t. It’s easily avoided as downtown jobs explore how, whether & where to return.”
Rep. Nicole Macri, D-Seattle, said she is looking at doing exactly that in 2021.
“Conversations are happening now,” she said. “There is now talk about an array of progressive tax measures that could help both address some of the revenue shortfalls facing the state as well as addressing increased needs of Washingtonians related to the COVID crisis.”
Of course, as AWB writes, state revenues are still growing.
When that shortfall was announced last month, Sen. John Braun, R-Centralia, noted that the state’s tax collections are still going up. Tax revenue will increase — not by as much as had been hoped and expected, but the state’s tax revenues are not going down, Braun said.
“The next biennium still projects more revenue than this biennium,” Braun said during last month’s Economic and Revenue Forecast Council meeting.
And, in yet another look at the negative impacts of the Seattle tax, former AWB president Don Brunell recalls the 1972 “lights out” billboard in Seattle.
Far too few people remember the 1972 Seattle billboard: “Would the last person who leaves Seattle please turn out the lights?” The reference was to the massive job losses at Boeing when the supersonic transport project collapsed and the company, then headquartered in Seattle, was on the ropes.
That was a painful time especially for working families and local government leaders.
The actions being taken now in Seattle threaten to create another lights-out moment, he writes.
While the worldwide economy has tanked under the coronavirus pandemic, most government leaders are looking for ways to restore jobs in the private sector, their economies, and tax revenues, while struggling to pay for essential services and contain the vicious virus.
On the other hand, Seattle’s City Council is heading in the opposite direction. It overwhelmingly passed the largest tax increase in history on business.
Expanding bad policy from the city to the state seems like an odd prescription for recovery.