Why the State Budget Shortfall is at least $3 Billion
For the past 3 years, I have issued quarterly reports critical of the Washington State Economic and Revenue Forecast Council’s (ERFC) Revenue Projections. My reports have accurately predicted that ERFC projections over-estimate State revenue by billions of dollars. These over-estimations of revenue have misled the legislature to pass budgets which could not be supported – requiring extra “special sessions” and billions in additional last minute emergency cuts during the past three years. The Revenue Council’s irresponsible and unreliable forecasts are the result of their failure to follow standard statistical methods. ERFC forecasts continue to be wildly inaccurate. This is no way to conduct our State’s business. The first step in problem solving is knowing how big the problem is. The ERFC failure to tell the legislature the truth has led to proposals which do not come close to solving our State’s budget problems.
Now that the ERFC December revenue report is out and the legislature has ended the latest special session by kicking the can down the road to 2012, it is time for our 2011 year-end review of the State Budget.
First, for those who have not yet read the ERFC December 12th report, here is a quick review.
Excluding a “property tax variance,” revenue was $14 million (or 1%) below the November 2011 forecast. Thus the State revenue picture continues to get worse. In December 2009, the ERFC predicted that by the end of 2011, Revenue Act receipts would grow rapidly exceeding $1,000 million per month. Instead, we remain below $900 million per month.
Total General Fund Revenue for the past year (December 10, 2010 to December 10, 2011) was $13.7 billion. Two years ago, annual State Revenue was also less than $14 billion. I predicted in November 2009 and again in November 2010 that annual State Revenue would remain at $14 billion per year (or zero percent growth) – due to the legislature’s failure to address structural problems with our economy. The Revenue Forecast Council predicted revenue would skyrocket by more than 20% (or $3 billion per year) to an annual rate of $17 billion per year.
Each time the Revenue Council has predicted a rapid V shaped rise in revenue during the past 3 years, it was proven wrong. But the Revenue Council failed to learn from their past mistakes. The Revenue Council continues to predict a sharp rise in revenue in 2012. They now claim biennial revenue will be above $30 billion – or more than $15 billion per year. Since we are actually at $14 billion per year or $28 billion per biennium – the revenue council continues to over-estimate revenue by at least one to two billion dollars for the current biennium.
The following chart compares my accurate prediction of Biennial Revenue ($28 billion) to the many Revenue Council inflated predictions of State Revenue during the past three years.
Comparing State Biennial Revenue Council Forecasts to Reality
As the following chart shows, the Revenue Council also predicted that revenue would be $34 billion in the last biennium. They eventually had to admit that revenue was only $28 billion.
The yellow line shows that they are following a very similar course of denial in the current biennium. Eventually, the yellow line will be forced to drop to the light green line just as the red line fell to the dark green line.
In summary, the Revenue Council initially predicted that 2009 to 2011 revenue would be $34 billion, while I predicted it would be $28 billion. It turned out to be $28 billion. Then the Revenue Council predicted that 2011 to 2013 revenue would skyrocket to $34 billion. I predicted it would remain between $28 to $29 billion. Recently, the Revenue Council lowered their prediction for the current biennium from $32 billion to $30 billion. But there is no evidence to support their claim. Instead, all of the statistical evidence, especially the fact that actual revenue for the past year was only $13.7 billion, continues to support my prediction that biennial revenue will remain between $28 to $29 billion.
Put another way, the Revenue Council claims that the budget shortfall is now $2 billion (requiring a drop in spending from $32 billion to $30 billion) when in fact the REAL budget shortfall is still at least $3 billion and could rise to $4 billion in the nest year (requiring a drop in spending from $32 billion to $28 billion).
A Direct Relationship between Employment and State Revenue
The reason I predicted revenue would remain at $28 billion two years ago is that the legislature was doing nothing about fixing the structural problems in our economy. Thus, there would be no increase in jobs and there would be no increase in State Revenue. There is a direct relationship between 2.8 million people working and $28 billion in State Revenue. Each person working generates $10,000 in State Revenue per biennium – or $5,000 per year.
Therefore, the only way revenue could rise to $34 billion per biennium is if 3.4 million people were working. This would require a rise in employment of 600,000 workers in the next year – or an increase of 50,000 workers every month for the next 12 months.
Here in Washington State, the private sector added only 6,400 jobs in September and October – but the public sector lost 4,000 jobs for a net gain of 2,400 jobs in two months – or 1,200 jobs per month. 5,000 teachers lost their jobs during these two months due to “past budget decisions.”
However, total employment remains at close to 2.8 million – while the real workforce is near 4 million – with about 7,000 young adults entering the workforce every month. So adding jobs at a rate of 1,000 per month is very bad news. It means that 6,000 kids are unable to find jobs – leading to a real unemployment rate among young adults of 50% and a real unemployment rate among all adults of more than 25% – and getting worse every month.
Employment at the beginning of 2011 was 2.8 million – essentially where it was at the end of 2009. It is now at 2.83 million – a yearly gain of 30,000 or a monthly gain of less than 3,000. Given that 7,000 new jobs per month are needed just to break even, and 50,000 jobs are needed each month to have a real recovery in State revenue, 2011 has been a disastrous year for workers here in Washington State. For the year, over 60,000 young adults were unable to start their careers and instead are still living at home with their parents – or couch surfing at their neighbor’s house. And over ONE MILLION ADULTS in our State do not have jobs and have been unemployed for more than a year!!!!
Sadly, the legislature is doing nothing to create jobs. Instead, they continue down the path of Hoover Economics. In the just concluded special session, they cut another half billion in State spending – which will lead to 5,000 more public sector job losses. And the Governor has proposed $2 billion more in cuts for the next few months – leading to another 20,000 public sector job losses. This “All Cuts” budget will only make our economic crisis much worse.
The Only Solution to our Economic Crisis is to Roll Back Corporate Tax Breaks.
In addition to firing thousands of additional public sector workers, the governor has proposed raising a billion dollars by raising the sales tax on poor and middle class families. Ross Hunter recently proposed raising the property tax to raise one billion dollars. Either of these options would greatly harm our State’s economy and cost 10,000 private sector job losses by removing $1 billion from struggling poor and middle class families.
The only solution which will actually create jobs and restore money to our State’s economy – without harming poor and middle class families – is rolling back tax breaks to wealthy corporations who can then deduct their State taxes from their federal taxes. Tax breaks for wealthy corporations have skyrocketed from $20 billion per year in 2000 to $50 billion per year in 2010 – robbing billions in school funding and removing $30 billion per year out of our local economy. Until the legislature reverses this disastrous corporate welfare policy, there will be no recovery.
Tax breaks for major corporations in our State have skyrocketed 250% during the past 12 years (from $22 billion per year in 2000 to $50 billion by 2010): Over 90% of these tax exemptions benefit the richest one percent, with much of this wealth being shipped out of State and even out of the country, creating jobs overseas instead of here in Washington State.
In shifting the tax burden to our middle class, and causing the firing of thousands of public servants, these massive tax exemptions for billionaires do not create jobs. Instead, they cost jobs. None of these billions in tax breaks resulted in any jobs. Instead corporations used these windfall profits to outsource jobs out of Washington State.
Microsoft as an Example of How Billions in Corporate Tax Breaks Harm our Economy
Let’s use Washington State’s most wealthy corporation as an example of their ability to pay their fair share of State taxes. This past year, Microsoft recorded a record profit of $23 billion dollars on record sales of $70 billion dollars. Had they paid a normal 1.5% Gross Receipts Business Tax like any other business in our State, they would have paid $1 billion in State taxes. This entire amount could have been deducted from their federal taxes – meaning they still would have recorded nearly $23 billion in profits – the greatest profit in the history of our planet.
If we simply required Microsoft to pay their fair share in State taxes, we could protect the jobs of 10,000 teachers – who will otherwise be cut in the coming year by the next All Cuts budget.
Wealthy Corporations can afford to pay State taxes!
Microsoft is not alone in experiencing record profits. The following chart shows the prior 12 months corporate earnings are at record levels: http://www.chartoftheday.com/20110916.htm?A
It is interesting to note that the original run up in real earnings from Great Depression lows to credit bubble highs took over 78 years. The current spike has taken 26 months.
Given that these wealthy corporations are making record profits by getting billions in tax payer bailouts and shipping our jobs overseas, isn’t it time that they at least start paying their fair share of State and federal taxes? For more information on the illegality of corporate tax breaks, visit my website: realwashingtonstatebudget.info.
More reasons there will be no growth in State revenue in 2012
In addition to the unwise give away of billions to multinational corporations, and the one million unemployed workers in our State, household net worth fell $2.44 trillion in the 3rd Quarter, a real decline of 4% – which would be an annual decline of 16%. The total loss in household net worth has now exceeded $20 trillion since 2008 – due almost entirely due to plummeting home values caused by millions of foreclosures. This crisis is getting much worse. Distressed (foreclosed) homes accounted for 28% of all sales in October 2011. Foreclosures have risen 21% in just the past 3 months according to a report by the Office of the Comptroller of the Currency. 1.3 million additional homes are now in foreclosure. Meanwhile, despite the trillions of dollars in tax payer bailouts to mega banks, the HAMP program has only helped 220,000 homeowners – less than 10% of the homeowners who have lost or will lose their homes. Obviously, as more people lose their jobs, there will be more foreclosures leading to a Hoover Economics Death Spiral. Things will not change until our State adopts FDR Progressive Economic policies by putting people back to work – rebuilding our economy from the ground up.
The next Revenue Council report is scheduled for January 15th. I will once again publish an analysis of that report a day or so after it is released. But until the insane corporate welfare is stopped, and until our legislature does something to address the extreme unfairness of our State’s tax structure so we create jobs instead of cutting jobs, we should expect more bad news. Feel free to email me back with your questions and comments.
Regards, David Spring M. Ed. Director, Fair School Funding Coalition