Dire Future for State Budgets?

Graph showing state and local health care costs vs. payroll costs over timeThe Washington Post has an article today (or some recent day – I only read online) about the long-term pressures faced by state and local governments.  The article compares growth in key revenue sources with growth in costs and projects a dire future. The title is “GAO: Without draconian cuts, states face decades-long fiscal crisis“.

Key concerns they have include

  • The sales tax continues to decline as a fraction of GDP. This means that over time people buy less stuff (as a percentage of their income) that is taxed.
  • Tax revenue in general will not return to pre-recession levels, as a percentage of GDP, until 2058.
  • State and local healthcare costs for employees and retirees, as well as Medicaid costs, will grow from 3.9% of GDP to 7.4% of GDP by 2060.

This is what Alan Durning at Sightline calls “Slow News.”  If we were crabs every now and then we would complain that the water in the pot seemed to be getting warmer, but we’d put off doing anything about it because the change wasn’t very fast… The quote about this in the article is

“The major problem is that governors and legislators have a very short-term vision: Don’t rock the boat and don’t do anything that hurts their re-election chances. It is so much easier to kick the can forward than to take what is needed — raise taxes [and] cut spending or do a combination of both,” Williams said.

In some ways Washington is better off than the majority of states. We have very little healthcare exposure for retirees compared to many states, and a healthy pension system. We’ve done a good job holding down the medical cost growth of Medicaid, but like other states we see an increase in  low-income seniors as a percentage of the population. This drives cost growth in this area.

In some ways, however, we are much worse off. We are VERY exposed on the sales tax, as it makes up about half of our revenue, and the 1% growth restriction on the property tax causes it to decline significantly compared to the size of the economy.

We’ve done a lot of significant cost-cutting during the recession years, eliminating billions in long-term pension costs, eviscerating the mental health system and squeezing the level of staff providing services. We’ve seen about a 15% reduction in the number of state employees per state resident in the last decade – significant productivity increases.

The thing we haven’t done is re-think the growth rates of the different tax sources to get them to align more closely with the growth of the economy. Former governor Dan Evans commented to me recently that had we adopted his tax proposal in the 70’s we would have about $5 billion a year more in revenue, with no other changes to the tax code. This would pay for the McCleary decision and a significant expansion of both early learning and our higher education system. I’m not espousing a specific idea here, but getting the tax code to be in balance with the economy would require less adjustment from the Legislature every year and be a more stable platform for growth.

About the Author

Ross

I am the Director of the Department of Early Learning for Washington State. I formerly represented the 48th Legislative District in the State House of Representatives, chairing the Appropriations committee and spent many a year at Microsoft.

2 Comments on "Dire Future for State Budgets?"

  1. Former Governor Dan Evans was one of the strongest Governors we’ve had – part of the progressive Republican faction that existed in those times. He was responsible for cleaning up Lake Washington, creating the community college system, and a host of other useful improvements to our lives.

    He pushed for an income tax, passed a constitutional amendment enabling it through the legislature with a 2/3 majority, then failed to get it passed by the voters.

    I’m not opposed to an income tax as part of a reasonable tax system, but don’t choose to spend a lot of energy on things that require a 2/3 vote in the legislature as they are unlikely to come about.

  2. Bellevue Resident | December 24, 2014 at 5:30 am |

    “I’m not espousing a specific idea here,” == well why not espouse this specific idea: enact Governor Evans’ budget from the 70s, whatever that was?

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