Washington to see $3 billion revenue boost following similar trends nationwide as states prepare for more federal funds

OLYMPIA – After a year of economic uncertainty and possible budget deficits, it looks like Washington’s revenue is right back to where it was a year ago.

In a forecast released Wednesday, the state’s projected revenue for the current budget cycle ending in June is up $1.3 billion while the projected revenue for the next two years is up by $1.9 billion, according to the state’s Economic and Revenue Forecast Council. That’s when compared to the previous forecast in November.

“We do expect stronger economic growth,” the council’s executive director Stephen Lerch said Wednesday, citing the federal stimulus package and increased vaccine distribution. “Still, clearly there’s some uncertainty associated with that.”

The substantial increase in projected revenue puts the state almost back to where it was last February, before the pandemic hit and talks of a possible $8.8 billion budget shortfall began.

State lawmakers will use the new forecast to write the state budget for the next two years. The revenue boost comes as the state is receiving billions of dollars in federal support from the recently signed stimulus package.

Since the last forecast in November, general fund collections, real estate estate tax collections and Revenue Act tax collections – retail sales, business and occupation, public utility and non-cigarette tobacco products – all saw improvements. Despite dropping in the beginning of the pandemic, the Revenue Act collections exceeded its previous peak in January 2020.

While the increase in revenue is a good sign, lawmakers are still cautious about the uncertainty of the COVID-19 virus. House Appropriations Chairman Timm Ormsby, D-Spokane, said lawmakers should be “quite concerned for the ongoing stability for our revenue system.”

Senate and House budget teams will release their proposals next week – slightly later than normal as budget writers try to learn how the federal stimulus money can be spent. Much of the federal package will have strict guidelines and likely used for one-time, COVID-19 costs, such as rental and business assistance or vaccine distribution.

“The flexibility we have is minimal,” Orsmby said.

Under the terms of the bill, the funds can be used to respond to the pandemic “or its negative economic impacts,” to pay essential workers, to offset lost revenue to pay for government services, or “to make necessary investments in water, sewer, or broadband infrastructure.”

However, state lawmakers did hint that they could use federal funds to improve the state’s transportation budget, but it is unclear to what extent they will do that.

Many questions surrounding the federal money won’t be answered by the time budget proposals are released next week, said Senate Ways and Means Committee Chair Christine Rolfes, D-Bainbridge Island.

State Republicans have criticized Democrats for introducing a new capital gains tax this session when the state has enough revenue and federal money coming in to balance the budget.

Ranking Republican on the Senate Ways and Means Committee Lynda Wilson, R-Vancouver, said Wednesday that if the state can’t live within its means, “we have a spending problem.”

State Democrats, on the other hand, have said now is the time to invest in long-term programs. Ormsby said the economic growth displayed Wednesday was not felt by everyone. It’s largely being realized by people who already have the means, he added. The state’s budget should reflect that.

Rolfes said Wednesday’s outlook, as well as the federal money, puts the state in a strong position for recovery, but it needs to be strategic. The forecast shows that the pandemic “didn’t clobber” the state, Rolfes said, but that doesn’t mean the state should go on a spending spree.

“I’m just offering some caution to folks,” she said. “I’m urging a steady course.”

Despite similar revenue increases nationwide, states prepare for federal funds

Washington’s revenue boost is in line with what many other states are seeing. Despite concerns with pandemic losses, a report from Urban Institute’s State and Local Finance Initiative showed that while there was wide variation among states, total state revenues nationwide declined by only 1.8% from April to December 2020, compared to that same period in 2019.

Twenty-two states, including Washington and Idaho, saw revenue increases while 28 saw decreases. Washington’s state tax revenues collected in the last three quarters of 2020 were 2.5% higher than during that same period in 2019, according to the report. Idaho’s state tax revenues for that same period were 10.4% higher than in 2019.

States that rely heavily on economic sectors hit hard by the pandemic saw the sharpest drops in revenue during that period. In Alaska, where the economy depends largely on oil production, revenue fell by more than 42% after oil prices plunged early in the pandemic. Tourism-heavy Hawaii and Nevada saw year-over-year revenue decreases of 17% and nearly 13%, respectively.

Lucy Dadayan, a senior research associate at the Urban Institute, said economists projected steep declines in revenue in mid-2020 partly to avoid repeating mistakes from the 2007-2008 financial crisis and partly because there was no recent precedent for such a disruptive event.

“We didn’t have a global pandemic for nearly a century, and so it was really hard to forecast revenues with any accuracy,” she said. “Fast forward eight or 10 months into the pandemic, we see that the revenue performance is much better overall compared to what the initial forecasts were.”

The states that have fared relatively well, Dadayan said, have revenue models that rely more on taxing workers and businesses that have weathered the pandemic better than most.

While Washington’s lack of state income tax could be a weakness, the state had substantially fewer per-capita cases of COVID-19 than other sales-tax-free states like Texas and Florida. Solid growth in insurance premiums, business taxes and the real estate market also buoyed Washington’s revenue.

Still, Dadayan said, Washington’s revenue grew by less than it would have were it not for the pandemic. She also warned that Boeing’s plans to cut some 30,000 jobs this year leaves a big question mark on the state’s revenue outlook.

Idaho, where more than 10% revenue growth led all states, benefited from several factors, Dadayan said. The state has seen steady population growth in recent years and most new arrivals are retirees who don’t depend on the job market while generating revenue by buying and renovating homes. The state’s booming construction industry remained open during the pandemic, while strong agricultural exports further boosted revenue.

Despite not having revenue shortfalls for 2020, Washington and Idaho received $7.1 billion and $1.9 billion, respectively, as part of $350 billion in aid to state, local and tribal governments in the sweeping stimulus package.

Critics say the spending is out of step with reality, especially in states like Idaho and Washington where revenues actually increased. At the same time, a provision in the bill prohibits states from using the funds to offset tax cuts, angering Republicans.

Idaho Gov. Brad Little, a Republican, has criticized the stimulus package for sending aid disproportionately to states that suffered higher unemployment after instituting stricter economic restrictions.

In a March 10 op-ed, he argued the restrictions on how the dollars can be used “would punish responsible states like Idaho for pursuing tax cuts for our citizens.”

A spokeswoman for Little said the governor will hold a press conference Thursday to address his plans for spending the state aid Idaho received through the stimulus package.

“An open economy, relentless focus on fiscal conservatism, quick action throughout the pandemic, and Idahoans’ preventive actions against COVID-19 have positioned Idaho with the strongest economy in the nation and a historic record budget surplus,” spokeswoman Marissa Morrison Hyer said in an email.

Idaho Sen. Mike Crapo, the top Republican on the Senate Finance Committee, sought to block that provision with an amendment March 3. He introduced a bill Monday along with Sen. Jim Risch, R-Idaho, to let states use the funds to cut taxes, but it is unlikely to pass in the Democrat-controlled Senate.

“If a state like Idaho wants to provide tax relief in the interest of economic recovery, and to help people return to earning their livelihoods, the American Rescue Plan says it will be financially punished by the federal government,” Crapo said in a statement. “This infringes on states’ authority to design their own fiscal policies, and invites partisan politics into federal and state relations.”

GOP attorneys general from 21 states, including Idaho Attorney General Lawrence Wasden, sent a letter to Treasury Secretary Janet Yellen on Tuesday raising concerns about the legality of the provision. Crapo sent Yellen a similar letter on the same day.

The Treasury Department responded Wednesday, saying states may cut taxes so long as they use their own funds – not the federal aid – to offset the lost revenue.