If legislators convene for a special session this summer, they’ll face an unprecedented economic and health crisis – and a stark choice: either raise new revenue from those who continue to prosper, or enact steep budget cuts that will worsen suffering and prolong the recession. Their decisions will signal who, and what, they care about most.
The challenge facing legislators in 2020
As of the end of May, the state’s unemployment rate is over 15 percent, and more than 1.5 million residents have filed an initial claim for unemployment insurance. With the nation officially in a recession as of February, Washington’s most recent economic forecast anticipates double-digit unemployment rates through 2021.
Special federal unemployment benefits worth $600/week are keeping many households afloat for now, but will end in July unless Congress acts soon. Likewise, loans provided via the federal Paycheck Protection Program have helped businesses keep many people on payroll, but they only cover up to 8 weeks of monthly payroll costs.
All of this pales next to the cost in human life, with more than 1,100 Washington residents dead from COVID-19.
The depth of the crisis – and the speed with which it has unfolded – means every school, social service and other public-facing agency is facing additional demands due to the economic, health and social fallout from COVID-19. Our public institutions need additional resources, both to help Washington residents get through this crisis, and to adapt to drastically changed circumstances.
But state forecasts now show revenue dropping by $4.5 billion in the current budget cycle (which runs through June 2021), with an additional $4.4 billion sheared off in 2021-23, and a further $4.5 billion decline in 2023-25.
Unless legislators reform Washington’s tax code to generate additional funding, they’ll have to cut funding for health care, education, mental health, housing, child welfare, and other services that are helping keep families afloat.
How an all-cuts budget will lengthen the crisis and deepen the damage
State budget cuts will hurt working and unemployed people, children and families, students and seniors, and vulnerable populations. They will be harshest for the low-wage workers, Communities of Color, children in poverty, and rural communities who were excluded by pre-COVID economic growth, deepening racial and geographic inequality.
Budget cuts will also deepen and lengthen the recession. In the wake of the last recession, from 2009 through 2012, Washington’s legislators made policy-level spending cuts totaling $13.2 billion. This austerity approach:
- caused significant, long-lasting harm to individuals and communities;
- reduced jobs and incomes, slowing economic recovery;
- exacerbated racial, gender, and regional inequality; and
- deprived working families, small businesses, and public agencies of the resiliency that would have put us in a much stronger position to respond to the COVID-19 pandemic.
Washington is already seeing these negative effects. In May, as parts of the economy started to reopen, private sector employment grew by 72,600 – but the public sector lost 20,100 jobs, so total nonfarm employment increased by only 52,500 overall.
What’s wrong with Washington’s revenue system
A recession always brings budget challenges, but Washington’s current revenue system is notoriously unfair, inadequate, and unstable – and the COVID-19 crisis has highlighted its many deficiencies:
- The sales tax, which accounts for about 50 percent of general fund revenue, taxes poor people at higher rates than the rich and hasn’t kept pace with population or economic growth.
- The Business and Occupation tax, which accounts for another 20 percent of revenue, is especially hard on startups and small firms because it taxes gross revenue, so businesses are taxed whether they make money or lose money in a given year.
- Over the years, the system has been swiss-cheesed by hundreds of exemptions worth billions of dollars.
Even when Washington’s economy is doing well, the state’s tax structure stifles investment in public priorities that build economic resilience and protect people in vulnerable times. On a per-capita, inflation-adjusted basis, overall state spending only recovered to pre-Great Recession levels in 2019. Most of those gains went to K-12 funding, pushed by the McCleary court decision. Funding for everything else was still more than 18 percent below 2008 levels.
What legislators need to change
We can make better choices now. Legislators can raise new revenue in ways that make our tax system stronger. Politically, that means putting the public good ahead of wealthy interests who benefit from the status quo, in order to rebuild public services for health care, mental health, and education, and begin to adequately fund early learning and care.
Increase B&O tax on high-grossing service businesses: In the last recession, one revenue increase the legislature did make was to temporarily increase the B&O tax rate on high-grossing service businesses. That approach could be followed this time as well.
Legislators could also raise the cap which now benefits Amazon, Microsoft, and other huge tech corporations in the Workforce Investment tax. That revenue helps low- and moderate- income students go to college, and increasing it would prevent deeply slashing higher education funding.
Employer tax on high compensation: Between July 2018 and June 2019, Washington state employers awarded compensation in excess of $250,000 to over 65,500 employees (1% of total employment in the state). Of these, over 3,000 received more than $1 million, more than 100 received between $5 million and $10 million, and 56 received more than $10 million.
The legislature should enact an tax on excess compensation, paid by employers, that is sufficient to raise at least $1 billion per year. Senator Joe Nguyen introduced this concept with Senate Bill 6017 in 2019, and Representative Frank Chopp is proposing a similar tax to fund the Health Equity And Recovery Trust Fund (HEART).
The state budget is the single most powerful tool Washington’s legislators have to respond to the COVID-19 economic crisis. By enacting revenue reforms now, they can provide the stimulus, support and therapy necessary for the economy to heal, so our workers, families, businesses, and communities can rebound and emerge stronger from this crisis in the future. Or they can choose to prolong suffering and further entrench deep racial and economic inequality in our state.
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