The way we talk about and report on the economy and the state budget often masks underlying problems. It can make it harder for our elected leaders to enact the policies we need to build more resilient and equitable communities.
Right now, reporting on the economy paints a picture of a robust economic recovery despite rising inflation. Job growth appears to be way up if the point of comparison is the period after massive pandemic-related layoffs in mid 2020. But if we look farther back to the beginning of 2020 the employment picture begins to look less rosy. As of January 2022, Washington was still down 60,000 jobs from the start of 2020.
Newly released state budget numbers reflect a similar story of strong economic recovery in Washington state. The February revenue report from the Washington Economic Revenue and Forecast Council (ERFC) showed a $7.5 billion surplus, or total reserves, in the state budget. Supplemental budget proposals now under consideration in the state legislature seem to reflect lots of increased spending in response to this surplus. However, upon closer examination, we see there is more to the surplus and economic forecast than meets the eye. By looking more closely at the data or zooming out to observe trends over time, we see the many ways austerity and inequality are baked into the state budget.
Austerity and inequality are baked into the state budget
Washington’s current tax system creates a chronic structural deficit that starves public programs and services of ample funding over the long term, compounding inequality. In addition, many areas of our state budget have never caught up from the massive cuts made a decade ago during the Great Recession. In other words, the scale of the operating budget relative to the size of our economy has been off for decades, and this year’s budget proposals are on-trend in terms of size and scale.
Inflation, stress, and two years of disrupted schooling each add to the seeming state budget surplus
The Consumer Price Index, a measure of inflation, has reached 7.7% in the western region of the United States and 7.6% in the Seattle area. Inflation is an easily understandable part of the economy that gets a lot of attention in the news, too. Shoppers may be immediately aware that now, when they go to the grocery store, the basket of goods they could once buy for $100 is now, on average, $107. Suddenly, eating out is taking out a big chunk of a family’s paycheck and filling up on gas is an increased source of stress. In recent national polls voters say their immediate worries are about inflation.
Economists have had different takes on the root causes of inflation. A recent post by Economic Policy Institute’s Josh Bivens points to a combination of likely contributors, including profiteering by corporations, wage hikes, low interest rates, government spending, and supply chain bottlenecks. Corporate consolidation is also a factor that allows corporations to drive out competitors and pass on increased costs, plus some, to consumers. Price increases fueled record corporate profits in 2021. Bivens concludes that the solution for tamping down on inflation is to regulate corporate profits, perhaps through a one-time corporate profits tax.
Regardless of the cause, inflation means increased prices. And in a state that collects 50% of its revenues from the sales tax, increased prices mean increased revenues from the sales tax.
Increased revenues as marijuana and alcohol sales jump, and home prices continue their meteoric rise
The EFRC report shows that Seattle saw near-record home price increases, just above 23% year over year, in early 2022. Thus, property and real estate excise taxes (REET), which are based on the value of a home, have also increased due to this inflated real-estate market.
Next, the well-being of our neighbors and friends is reflected in the state’s surplus, too. With stress levels off the charts and therapy unavailable to many either because of costs or lack of therapists, marijuana, and alcohol sales have dramatically increased. Revenues from cannabis-related taxes are up nearly 30% from before the pandemic. These increased sales contribute significantly to the growth in state revenues overall: cannabis taxes alone bring in around $1 billion per biennium.
Maintenance level spending
In addition to revenue, the budget also includes how much base level spending the state expects to do, also known as “maintenance level spending.” Revenue minus maintenance level spending makes up the basic arithmetic of the budget: in broad strokes, more revenue than maintenance spending means a surplus. Maintenance level spending is the amount of funds the government requires to simply keep doing what it’s already doing, without any policy or tax changes by the legislature. K-12 education takes up about half of the state’s maintenance level spending each year. The latest forecast projects maintenance level K-12 education to cost $1 billion less than originally budgeted last spring. Every time a student leaves the public school system, which high numbers of students did during the pandemic for a variety of reasons, public schools lose funding. However, as any teacher, parent, staff, or student will tell you, running a school effectively and equitably in the midst and aftermath of a pandemic requires more resources, not less. Plus, schools have been chronically underfunded for decades.
To sum up, the state budget surplus is a result of increased revenues, which are partially driven by inflation. It is also a result of lower uptake of public programs and services, or “caseloads,” reflective of pandemic-related barriers to access and a complex constellation of COVID era cuts. Ultimately, lower caseloads often mean people haven’t gotten the care or services they need.
Lawmakers need to invest deeply in our people and services now
How the state raises taxes and spends state resources (or doesn’t) has material, real-world consequences. The large surplus reported by the ERFC comes at a time of growing economic and political instability. There are the escalating and ongoing crises of climate change and pandemic; the Federal government looks to stave off inflation by increasing interest rates at just the moment that another recession looms; and Russia’s invasion of Ukraine is causing immense human loss and suffering as well as destabilizing energy, commodity and other global markets. It is important to investigate the state’s economy beyond the top line numbers to understand how lawmakers can address systemic issues in our economy that perpetuate inequality. The economy is a result of policy choices and is not a law of nature. Lawmakers need to invest deeply in our people and services now, and going forward, tackle the harder job of creating a more fair tax structure. With robust investments that provide amply for public services, we can reverse the tide of growing inequality and put our state on a more sustainable path.
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