Imagine for a moment that you are a politician. For this exercise, you are either a state senator or representative. You are also a member of the Democratic leadership team. The scenario you face is as follows:
Your state’s unemployment rate is at its highest in decades. In the last 18 months, a bank that got its start in your state went bust and became the largest banking failure in U.S. history. Your state’s chief private employer laid off 4,500 workers and announced it would expand in a state with a more favorable business climate, where unions don’t call the shots. Small businesses are struggling under a tight credit market, reduced consumer appetites, and impending workers’ compensation and unemployment insurance tax hikes.
You are halfway through a two-year budget cycle, facing a $2.6 billion budget deficit. Unfortunately, you have used up most of your available one-time funds and you must balance the budget using cuts, tax increases, or some combination of the two.
Unions have threatened to stop contributing to your campaign and caucus if you fail to support a tax increase. But you and most of your colleagues are up for re-election in 2010, which makes the situation even more delicate. Still, you are feeling fairly confident, since voters recently rejected a statewide initiative that would have restricted the rate of government’s growth. In addition, you can now suspend a voter-approved initiative requiring a two-thirds vote of the legislature for tax increases.
Your party can afford to sacrifice a few members in certain swing districts without losing its majority. Too many losses, however, will turn your majority into a minority.
What’s your move?
By now, the Democratic leadership’s primary, secondary and tertiary plans have all been established. They’ll wait until the last minute to reveal their hand, so opposition can’t organize in time to mount targeted campaigns.
Normally legislators would use Governor Gregoire’s budget proposal as a starting point for their own. But this year’s gubernatorial budget was declared dead on arrival by the governor herself.
Her ‘real’ budget, slated for release next month, will propose at least $700 million in new taxes—equivalent to a 25 percent surtax on all Business & Occupation tax rates. Even with that level of increase, the state will still have to confront a multi-billion dollar problem in 2011.
The governor has hinted that most of the increases will come in the form of “tax loophole closures.” An honest discussion about tax reform, including the closure of various tax loopholes, is generally a good thing.
Tax loopholes were created by the legislature to give preferential treatment to certain industries and behaviors that legislators wanted to encourage. Loopholes narrow the tax base, which necessitates a higher rate for the remaining taxpayers.
The vast majority of economists will argue that everything should be taxed once, and only once, to keep tax rates as low and as broad-based as possible. But the tax loophole closure idea is not being advanced with the hope of broadening the base and lowering the rate for all taxpayers. It is solely a revenue grab.
Tax-raising alternatives to loophole closures are just as problematic.
A full percentage increase in the state sales tax would not raise enough cash to close the current deficit, and it would boost the top marginal tax rates to 10.5 and 11 percent in King County retail stores and restaurants.
Sin taxes are more popular with voters, but they can’t come close to plugging the budget hole.
A business and occupation increase would discourage hiring and lead to lay-offs and wage reductions in some cases, further slowing economic recovery.
A property tax hike is more visible to voters than almost any other tax, and therefore not likely to be considered.
There are other possibilities, but any tax increase would dampen economic recovery and still leave a budget problem for 2011.
For legislators, 2010 is a year of dilemma. For taxpayers, 2011 will be worse. The upcoming elections are a check on legislative behavior, but taxpayers will have no such protection in 2011.
If legislators fail to make needed changes to the budget to address the unsustainable level of state spending, it will be déjà vu next year. Even if they get away with plugging the current budget hole with new taxes, the nature and size of the problem is such that they will be back again with their hands out in 2011.
In recent years, legislators have had the luxury of basking in artificially-high tax revenue, fueled by consumer debt spending. As a result, lawmakers thought less about what government is supposed to do and more about what they wished it would do.
In the midst of a recession, Washington’s families and business have had to economize and rethink their priorities. Shouldn’t our state’s leaders do the same?
Amber Gunn is director of the Economic Policy Center for the Evergreen Freedom Foundation, a nonprofit, public-policy think tank in Olympia.
