Building an Economy that Works for Everyone

State Tax Increases, Spending Could Protect Washington Job Market

Washington State is losing an estimated 44,000 private and public sector jobs due to billions of dollars in state budget cuts in 2009 – and further cuts could axe another 33,600, according to EOI’s latest economic analysis. By contrast, a combination of new state taxes and federal aid to fill the state’s budget gap could save up to 30,000 jobs.

Economist Mark Zandi of Moody’s estimates that every dollar of state spending generates $1.41 of economic activity. Much of that spending – 62%, or 88 cents – boosts the private sector. Cutting state spending means fewer purchases from suppliers, reduced contracts with service providers, less money from public and private employee paychecks circulating through local businesses – and of course, fewer public services.

Lawmakers in Olympia are now facing down a $2.6 billion revenue shortfall. Using Moody’s numbers, EOI policy director Marilyn Watkins estimates that maintaining spending levels entirely through new federal grants and fund transfers would save the state over 33,000 jobs versus an “all-cuts” budget approach. But if federal aid doesn’t come through, even raising the entire amount through new taxes would save 9,000 to 26,000 jobs, because cuts in state spending hurt economic activity more than tax increases.

Zandi isn’t alone in his assessment. Economists Peter Orszag, now serving as director of the Office of Management and Budget, and Joseph Stiglitz, economics professor at Columbia University and former Chief Economist of the World Bank, concluded that steep reductions in spending and services by state governments actually cause more economic damage than increasing taxes – especially on higher-income individuals who would otherwise save a portion of the money or spend it out-of-state.

So what taxes to raise? Watkins says lawmakers should focus first on profitable multi-state or multinational businesses, thereby keeping money in Washington that would otherwise have been saved or spent elsewhere. Second, extend the sales tax base to goods and services to slow erosion of the state’s tax base and stabilize future revenues. Third, reevaluate business tax breaks: from 1994 to 2008, the Washington legislature passed 185 such special tax exemptions that now cost the state an estimated $2.5 billion in every biennial budget.

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