Washington’s fiscal condition compared to other states; role of federal aid shows another side of progressive federal income tax

Next week begins a legislative session poised to confront significant budget challenges (see here, here, and here). Washington’s not alone, of course. Other state legislatures will also be writing budgets this year, raising a question about relative fiscal health. How does Washington compare?

Emily Makings with the Washington Research Council reviews a pair of fiscal reports that provide answers to the question.

First, in the Fall 2018 edition of “The Fiscal Survey of States,” the National Association of State Budget Officers (NASBO) finds, “Compared to this time last year, state fiscal conditions show signs of significant improvement.” …Washington’s general fund expenditure increase from 2017 to 2018 was the nation’s 10th largest. Similarly, Washington’s general fund revenue increase from fiscal year 2017 to 2018 was the ninth largest in the country. Looking at 2019 budgets, Washington’s general fund expenditure increase ranks third highest, but Washington’s general fund revenue increase ranks just 35th highest. One reason for the low ranking on revenues is the property tax reduction for 2019 that was enacted last year.

And,

The second paper is the Volcker Alliance’s “Truth and Integrity in State Budgeting.” It “grades states’ success in pursuing transparent and fiscally sustainable procedures as they estimate their revenues and expenditures and attempt to keep them in balance.”

…The report’s grading system considers budget forecasting, budget maneuvers, legacy costs, reserve funds, and budget transparency for 2016, 2017, and 2018. Washington gets fairly good marks in 2018: A’s for budget forecasting and reserve funds, B’s for budget maneuvers and transparency, and a D for legacy costs.

We recommend her brief post to those concerned about relative fiscal strengths and concerns. She also examines recent budget maneuvers and their effects on reserves.

One aspect of state budgeting that often gets short shrift is states’ reliance on federal funding. The Tax Foundation has produced a map and blog post that helps put federal funds in perspective.

Notice, Washington ranks No. 38 if federal funds received as a share of general revenues. TF analyst Katherine Loughead writes,

States that rely heavily on federal grants-in-aid tend to have sizable low-income populations and relatively lower tax revenues. States with relatively lower reliance on federal aid tend to collect more in taxes and have smaller low-income populations, although some exceptions exist.

We bring this up as further evidence of the role fiscal federalism plays in state-local tax and spending policy. A WRC report released last year lays out the concept (we discussed it here). An excerpt:

We also point to a key principle of fiscal federalism (a theory allocating responsibilities among the three levels of government), which holds that redistributive tax policies are best enacted at the national level. Adding this dimension to the analysis leads to our third finding:

3. All state and local tax structures are regressive. But when the steeply progressive federal income tax system is considered, the overall federal-state-local tax burden is progressive in Washington and every other state, and the differences among thestates represent smaller proportions of households’ tax burdens.

Further buttressing the importance of fiscal federalism (and mitigating criticisms of Washington’s tax structure) is this.

With respect the observation made by Matthews that “redistributionist” policies are better handled on the spending side than through taxes, we previously wrote that Washington looks pretty good on that score. We cited a Governing magazine article that stated, 

In 2014, the nonprofit Federal Funds Information for States (FFIS) warned that fairness is just one feature of a good tax system. Others are adequacy, simplicity, transparency and ease of administration. For example, FFIS pointed out that while Washington ranks poorly in tax fairness, it puts more of its revenues toward programs that support low-income families.

“Sometimes the policies that satisfy one feature run contrary to another, making it important that a system be evaluated in its entirety rather than in a piecemeal fashion,” the group said. (Emphasis added.)

Revenues progressive federal income tax, then, are (in part) distributed to states to provide assistance to lower income households and individuals. That more of it goes to states with higher concentrations of people living in poverty is a further demonstration that the system is working as theory intends.