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A sea of budget trouble: Court ruling widens state gap to $1.2 billion

• Published October 03, 2009

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The state's financial troubles keep growing, and the estimated shortfall that state lawmakers must bridge in January is now estimated at over $1 billion, perhaps $1.2 billion.

That means more budget cuts in January, of course, and maybe tax increases. Gov. Chris Gregoire opened the door to the latter this week when she said she'd entertain proposals -- though not necessarily embrace them. It's not so simple as just cutting spending, as I'll explain below, because strings attached to the economic stimulus package are putting limits on what legislators can hack from some key programs.

First, the latest hit to the state's checkbook: A state Supreme Court ruling on Dot Foods' lawsuit against the state. The court narrowly ruled in a 5-to-4 decision in early September in favor of Dot, and the result is now estimated to take a $237 million bite out of the state’s bottom line, according to Victor Moore, budget director for Gov. Chris Gregoire.

(Justice Charles Johnson's majority opinion is here; Justice Debra Stephens' dissent is here.)

The state Department of Revenue says the Dot Foods decision expanded the business-occupations tax exemption for companies doing door-to-door business in Washington, and it now means some products sold in retail outlets are not taxed. And the ruling applies to more than the firm that sued the state, so the cost is pretty high.

Revenue spokesman Mike Gowrylow said the agency's lawyers are asking the court to reconsider its Sept. 10 ruling. The agency released its estimate of impacts to the state this week. Moore then outlined the situation to lawmakers this week, explaining that the cost includes about $100 million for refunds and the rest is the anticipated cost of applying the ruling over the next two years.

Moore said lawmakers could decide to change the law as a way to close what some might regard as a new loophole.

The court ruling is on top of other hits that have been accumulating since lawmakers left town in April. They left believing they had cut enough (more than $4 billion), and they left some $800 million in reserves.