It’s Not Just the Recession: The Budget Crisis and Washington State’s Structural Deficit

How fast should government and government spending grow? Do they need to grow at all?

These questions are an important part of the on-going debate over Washington state’s budget and tax system. In order for state services to meet the demands created by a changing economy and growing population, state revenues need to grow at the same rate as overall economic growth.

Until the mid-1990s, Washington’s state spending did grow along with the economy. Unfortunately, under Washington’s antiquated tax system, public revenues grow more slowly than the general economy unless tax rates are continually raised. For decades the legislature did periodically raise tax rates in order to keep up with demand for improvements in public education, transportation, and other state services. However, in the 1990s a series of people’s initiatives and legislative actions cut taxes. The economic boom of the 1990s generated sufficient public revenues to blunt the effects of those cuts at first. But the boom is over, and isn’t likely to return for any sustained period.

The national economic downturn that began in 2001 has hit the Pacific Northwest particularly hard and has been a major factor in large deficits in the state budget. Almost every state in the country is faced with similar deficits in 2003. However, unlike most other states, Washington’s financial problems will remain even when our economy is flourishing again, because our tax system is so out of step with the 21st century economy. Washington residents will face a continuing struggle to find sufficient public revenues to fund the level and quality of government services they want and need – unless we bite the bullet and reform our tax structure.

At the root of Washington’s long-term budget problem is the heavy reliance on a retail sales tax on goods, a part of our economy that is shrinking. As the 2002 Washington Tax Structure Study Committee headed by William Gates, Sr. also concluded, Washington state needs to expand the tax base to fit the 21st century economy, particularly by:

  1. extending the sales tax to areas of the economy that are growing, that is services; and
  2. adding a new source of revenue to our overall system that can be expected to keep pace with general economic growth. Since personal income grows at the same rate as the economy, a personal income tax would best fill this need.

These reforms would also improve Washington’s tax system by making it fairer, distributing tax paying responsibilities more equitably among state residents.

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