Washington Research Council Blog

New Brief: The First 2012 Supplemental Budget

During this legislative session, legislators must close a significant 2011-13 budget shortfall.  They started the work during the special session late last year.  In a new policy brief today, we look at the 2012 supplemental that was enacted in December.  It solved only part of the budget problem. 

Seattle Times, Microsoft executive urge action on higher education

Sunday's Seattle Times carried a strong editorial page call to action. "Losing kids on the path to prosperity" charts a course from early learning through higher education. Editorial page editor Kate Riley explains the urgency.

The state of Washington's education system — and by system, we mean the ways we educate our citizens from birth through graduate school — is imperiled. State decision-makers over the years have prioritized many things over this core function of government, which underpins our economy and quality of life.

She singles out a significant higher education gap.

The state's higher-ed institutions are economic engines in their communities, educating our own citizens to take the jobs our businesses offer. But there is a gap: Even in this era of high unemployment, many jobs in our state want for qualified Washington applicants.

Elsewhere on the page, Microsoft General Counsel and EVP Brad Smith makes the case for widespread reform, noting that the budget challenge creates an opportunity to make substantial progress.

The education debate this legislative session cannot be limited to a conversation about funding. Because the solution is not just investment; it requires putting our dollars into what works in helping students succeed. Student success is the single most important outcome against which our teachers and schools should be measured. And it is toward that outcome that our public resources should be directed.

I encourage you to read the whole thing. 

Union membership rate stayed flat in 2011

The Bureau of Labor Statistics released the 2011 union members report Friday. 

In 2011, the union membership rate--the percent of wage and salary workers who were members of a union--was 11.8 percent, essentially unchanged from 11.9 percent in 2010, the U.S. Bureau of Labor Statistics reported today. 

The number of wage and salary workers belonging to unions, at 14.8 million, also showed little movement over the year. In 1983, the first year for which comparable union data are available, the union membership rate was 20.1 percent and there were 17.7 million union workers.

Not too much surprising in some highlights:

Public-sector workers had a union membership rate (37.0 percent) more than five times higher than that of private-sector workers (6.9 percent). 

Workers in education, training, and library occupations had the highest unionization rate, at 36.8 percent, while the lowest rate occurred in sales and related occupations (3.0 percent).  

Mickey Kaus finds the major story.

Only 6.9 percent of private sector workers are in unions. That’s the same percent as last year. In the middle of the 20th century, it was 35%. … The number is significant because it suggests that labor’s much-publicized private sector organizing drives have failed. They appeared to be meeting with some success a few years ago–the private sector rate actually rose from 7.4% to 7.6% between 2006 and 2008. Those union gains have now apparently been lost, and the private sector unionization rate again asymptotically approaches zero. 

Little wonder the news out of Indiana is capturing so much attention today.

 

 

Machinery & Equipment Exemption Key to Keeping Jobs, Investments in Washington

Manufacturing continues to be a strength of Washington's economy. We have published a Policy Brief on the machinery and equipment exemption, which contributes to that strength by encouraging the capital investments that anchor manufacturing here.

U.S. Chamber gives WA poor marks for employment laws and regulations

At Olympia Business Watch, AWB president Don Brunell writes that the latest review of state employment laws and regulations by the U.S. Chamber of Commerce again places Washington in the "poor" category, along with 14 other states. The Chamber's study assigns each state one of three grades: Good, Fair, Poor. 

As Brunell points out, there are direct negative jobs effects from excessive regulation.

If all states were to improve their regulatory climate to the levels discussed in the report, the effect would be a one-time boost of 746,462 jobs. Moreover, the rate of new business formation would increase by 12% resulting in the creation of 51,590 new firms each year across the country. In Washington State, the Chamber says 17,847 new jobs would be added and 12,167 new businesses.

A timely reminder to legislators as they consider how to spur investment and job creation.

Tax Foundation: WA has nation's 7th best business tax climate. There's more.

The Tax Foundation, a respected national tax policy research group, released its annual report ranking the business tax climate in the 50 states. As it has in the past, the group gives Washington generally high marks. This year, the state comes in No. 7, up one from last year's 8th place ranking. 

Here's the TF news release, blog post, and full study.  

Although we've been critical of the TF methodology in the past (see here, for example), we believe the study provides an abundance of good information about state tax policy and its impact on business. Moreover, they have consistently improved their methodology. Our criticism focuses on two issues:

1. It's not clear to us that it is possible to rank states fairly on a single business tax climate index. There's simply too much variation in how tax policy treats different sectors for the ranking to be as clean as most analysts would like.
2. The TF methodology gives extraordinary weight to income tax issues. The top 10 states in this year's ranking are, in order, Wyoming, South Dakota, Nevada, Alaska, Florida, New Hampshire, Washington, Montana, Texas and Utah. 

TF explictily accepts the charge of overweighting the absence of a major tax.

It is obvious that the absence of a major tax is a dominant factor in vaulting many of these 10 states to the top of the rankings. Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: the corporate tax, the individual income tax, or the sales tax. 

Several of these states, including Washington, have also been high growth states. As noted in our analysis of Initiative 1098, states with steep progressive income tax rates have been substantial losers in the competition for jobs and investment. In that policy brief, we cited the 2010 TF report,

No matter what the average rates are, the high marginal rates will affect the state’s position in several prominent national business climate rankings. Washington ranks 9th best in the Tax Foundation’s 2010 State Business Tax Climate Index. The overall index bends five major components indexes: corporate tax, individual income tax, sales tax, unemployment insurance tax and property tax. Washington ranked 33rd, 1st, 50th, 26th, and 21st respectively in these components. The state’s high overall ranking was largely dueto the lack of an income tax, which resulted in the “number one” ranking in that component.

This year, we rank 30th in corporate tax, 1st in individual income tax, 48th in sales tax, 18th in unemployment insurance and 22nd in property tax.

It's important to read the Tax Foundation report as one useful barometer of business tax climate. Another, complementary, approach is taken by the Council on State Taxation. We reported on the COST business tax study in a blog post last summer. The crux:

COST finds that state and local business taxes in Washington amount to 5.4 percent of Gross State Product, significantly higher than the US average of 5.0 percent. 

In my column this morning, I write about legislative proposals for a new personal and business income tax, a capital gains tax, and extending the sales tax to personal and professional services. Each of these proposals would exert a drag on our business tax climate. I'll not go into detail here. Please read the column. I should note this finding from the TF report:

States with the worst scores on the [sales tax]  are Hawaii, New Mexico, Washington, South Dakota and North Carolina. Their tax systems hamper economic growth by including too many business inputs, excluding too many consumer goods and services, and/or excessive rates of excise taxation.

Keep that in mind when you hear charges of "excessive" use of tax incentives in this state. 

We and others have been critical of business taxes here. There's room for improvement. And there are some things we're getting right. It would be a tragic mistake to use the good news to promote bad business tax proposals. 

New Brief: The Drag of Unfunded Commitments

During the current legislative session, legislators must close a significant remaining 2011-13 budget shortfall. When in a situation like this, it is tempting to suspend programs rather than eliminate them, in the hopes that the economy will improve in the next biennium.  Indeed, legislators have deferred spending on various programs, in this biennium and previously.

Our latest policy brief looks at three examples of such deferred spending: I-728, I-732 and paid family leave.  These programs have already been suspended by the legislature so that they will not be funded in 2011-13 (and, in the case of paid family leave, 2013-15).

Instead of pushing spending forward, the legislature should simply end programs that are not priorities.  Otherwise, by remaining on the books, they are built into the base of future budgets.

Proposed capital gains tax would add volatility to state tax structure

State Rep. Laurie Jinkins, D-Tacoma, has proposed a new, 5 percent capital gains tax. Introduced as HB 2563, the measure has picked up 26 Democratic sponsors and will doubtless generate a bit of buzz. At least the think tank that germinated the idea is pleased. Here's what the Washington State Budget and Policy Center has to say about it today:

House Bill 2563, which would create a new 5 percent excise tax on high-end capital gains in Washington, would tap this highly concentrated economic resource in order to restore public investments in health care, education, and other public structures proven to foster job-creation and broadly-shared prosperity.

The Center displays a graph based on Congressional Budget Office data showing that capital gains are increasingly more concentrated among the nation's wealthiest taxpayers. The graph ends at 2007, as do most of the media reports of the growing wealth disparity in this country. It reminded me to check back on this Alan Reynolds op-ed in in the Wall Street Journal. 

Looking at the CBO's report on income inequality, Reynolds writes:

...here's a question: Why did the report stop at 2007? The CBO didn't say, although its report briefly acknowledged—in a footnote—that "high income taxpayers had especially large declines in adjusted gross income between 2007 and 2009."

No kidding. Once these two years are brought into the picture, the share of after-tax income of the top 1% by my estimate fell to 11.3% in 2009 from the 17.3% that the CBO reported for 2007.

The larger truth is that recessions always destroy wealth and small business incomes at the top. Perhaps those who obsess over income shares should welcome stock market crashes and deep recessions because such calamities invariably reduce "inequality."

Setting aside the unanswerable "fair share" questions, let's consider what taxing capital gains might mean to the state's revenue stream. As Reynolds points out, incomes at the top tend to be volatile. California serves as a poster child for the hazards of overreliance on taxes that fall most heavily on the wealthy.

Stateline.org reports: 

With a revenue system that's heavily dependent on income taxes on the wealthy, California's budget has a history of unexpected booms and busts that reflect the vagaries of the national economy. In that context, it's notable that the state Legislative Analyst's Office (LAO) has declared that "revenue estimates are an even bigger question mark than usual for the Legislature this year."

Sure, there's the uncertainty associated with taking a tax plan to the voters. But even clearing that hurdle doesn't solve the problem. Capital gains taxes are tricky.

Forecasting capital gains is notoriously difficult. That's partially because all economic forecasting is imprecise, but also because capital gains can rise and fall suddenly, independent of the expansions and contractions of the economy as a whole...

The very wealthy tend to claim a greater proportion of their income in capital gains. For that reason, the revenue from Brown's income tax plan depends heavily on the capital gains number. By targeting the rich, Brown's plan would make California's tax code more progressive, but also potentially more volatile. 

That "potentially" is a nice, but unnecessary, qualifier.  

Capitol Weekly has this.

Gov. Brown’s latest budget reflects California’s risky, roller-coaster reliance on uncertain revenues generated by wealthy taxpayers. And there’s no immediate end in sight, given that the governor wants voters’ permission to raise those taxes further in November.

That assessment from the Legislature’s nonpartisan fiscal adviser is at the heart of its analysis of the governor’s draft budget for the 2012-13 fiscal year which he hastily unveiled last week amid a staff mix-up. The year begins July 1.

“Already, California's budget is dependent on volatile income tax payments by the state's wealthiest individuals,” the Legislative Analyst noted.

I understand that lawmakers here are interested in some new revenue. If they're serious about long-term sustainability, capital gains taxes should be the last place they look. No need to take that roller coaster ride.

Moving ahead with education reform despite state budget challenges

Last Friday, I noted that education reform dominated the first week of the legislative session. A good op-ed by Dean Allen, CEO of McKinstry Co. and current chair of the Washington Roundtable, explains the urgency.

By 2018, two out of three family-wage jobs in our state will require post-secondary education or training. Yet, on average, nearly 30 percent of our students don't graduate from high school. Of those who do, 50 percent can't demonstrate proficiency in math, and 50 percent of students who enroll in our community colleges need remedial training, most often in math. 

To make matters worse, Washington is one of fewer than 10 states in the country in which achievement gaps between white students and students of color are growing.

...we can all agree ... that changes are needed if we truly desire success for all kids.

He emphasizes the reforms rolled out last week, including better systems of performance evaluation and charter schools. Read the whole thing. Funding questions, he notes, should not preclude action today.

It's tempting to think that nothing can be done right now, given the budget crises hindering our state and local governments, but we can put ourselves on an aggressive path toward improvement by making certain no-cost or low-cost changes in concert with modest public investments and community and business support.

The News Tribune editorial board reaches the same conclusion.

Washington’s schools do need better funding – but their need for better thinking is more fundamental and more urgent. Especially when money is tight and every possible advantage must be wrung out of every precious dollar.

The schools need a bundle of reforms. 

See also this Walla Walla Union-Bulletin editorial supporting charter schools.

Finally, here's Superintendent of Public Instruction Randy Dorn's statement on education reforms.

Tax simplification supported by governor and business community, some major cities opposed

AWB president Don Brunell blogged recently about the advantages to businesses of the B&O tax simplification measure endorsed by Gov. Chris Gregoire. Brunell writes:

AWB has pointed out the B&O tax is different than the sales tax because at least 39 cities collect B&O taxes independently using their own rules, penalties and fees. B&O taxes are not uniformly implemented like sales taxes.This creates asignificant burden for small businesses.

The governor's policy brief makes the right point, particularly in this economy.

Small business owners should be able to spend their time growing their business, not puzzling over multiple forms and differences between state and local B&O taxes. Most businesses want to pay the right amount of tax. Simplification will make it easier for businesses to understand and comply with their tax obligations.

Still, as the Seattle Times reports, major cities oppose the measure.