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Budget crisis Act II

Legislators return to Olympia this week facing a budget problem much worse than what they had expected when they wrapped up their most recent budget almost nine months ago.

The state’s slow economy wiped out billions of dollars in expected state revenue over the summer and fall. Despite election-year concerns, majority Democrats are almost certain to close tax “loopholes” and use other tax increases to make up a portion of this year’s shortfall and to try to stave off part of an expected $2.8 billion budget gap next year.

Democrats, including Gov. Chris Gregoire, say that if they can’t find at least $700 million a year in new revenue the state’s high quality of life is at risk because the cuts that will be required will shred the state’s safety net.

Gregoire signaled last week that the tax-fearing business community might find something to like in her tax package, which is expected to include tax breaks for small businesses and hard-hit areas of the state.

Gregoire is not saying which taxes she wants to raise or cut, and there is a lot of guesswork on all sides as lawmakers convene their 60-day session at noon Monday.

“Are we content to lose ground in these areas – lose health care coverage, increase class sizes and see the quality of life decline – or are we going to take a stand and say, ‘No, we’re committed to making improvements in these things, even despite the tough economy’?” Senate Majority Leader Lisa Brown, D-Spokane, said last week during an Olympia forum.

The GOP, which is outnumbered 61-37 in the House and 31-18 in the Senate, is chanting a straight no-tax mantra. Republican Rep. Gary Alexander of Thurston County wants to farm out more state operations – including liquor sales and distribution – to the private sector to trim a few million dollars a year. Democratic Sen. Tim Sheldon of Potlatch also has a plan to privatize liquor sales.

Alexander and many fellow Republicans also want to cut the state’s Basic Health Plan and other programs that the state pays for without federal help.

And House Republican leader Richard DeBolt of Chehalis says other states are “stripping away regulations” and barriers for businesses to create jobs, while Washington considers taxes that might kill jobs.

TAX-INCREASE PICTURE IS BLURRY

Democrats have held their cards close to the vest on tax increases, and they remember how their party lost control of the Legislature after raising taxes in the early 1990s. Republicans had similar experiences in the early 1980s.

Brown says her caucus wants to focus first on cutting state expenses, including taking early action on Gregoire’s request to eliminate 78 boards and commissions, merge smaller agencies with larger ones, and streamline several agencies in the commerce and natural resources areas. Those moves could save $16 million, Gregoire’s budget office says.

Brown also has raised the specter of furloughs or temporary layoffs for public employees, and she is warning of additional job cuts. Legislative employees already have taken 40-hour furloughs, which consist of time off without pay, in the budget year that ends June 30. Gregoire’s budget would cut more than 1,500 jobs through mid-2011 in addition to 3,200 eliminated in last year’s budget.

House Speaker Frank Chopp says lawmakers still are exploring what revenue they might raise, as well as the amount they’ll need. He said Democrats want to find and close unfair tax loopholes, but they also want to see what spending reductions they can make.

House Democrats have been looking at about $500 million in tax loopholes, exemptions or increases. One exemption is for out-of-state sellers of products door-to-door, which a state Supreme Court ruling last year opened wider than lawmakers ever intended in the Dot Foods case. Closing it could restore $154 million to the coffers.

The court’s 5-4 ruling expanded the exemption for door-to-door sales of consumer products to include “any qualifying out-of-state business selling consumer products, and possibly non-consumer products” in Washington, according to the Department of Revenue. Without legislative action, out-of-state wholesalers could avoid the tax even on products sold in stores.

Other ideas: Rep. Eileen Cody of Seattle wants to add $1 to the state’s $2.025-a-pack tax on cigarettes, raising as much as $95 million in the first year; House Majority Leader Lynn Kessler has mentioned a tax on bottled water, which might bring in $134 million next year; and a sales tax on candy and gum could bring in $28 million but has elicited cries from Republican Rep. Ed Orcutt that it is a tax on children. Rep. Deb Wallace of Vancouver wants to raise $37 million by closing a sales tax exemption for some out-of-state residents who buy products in Washington.

Those House ideas, which are just getting discussed, would not go nearly far enough to cover the gap that Gregoire’s budget identified. But some members of the human services community have called for additional taxes – with some privately suggesting a range of proposals, including a temporary sales tax increase or expanding the sales tax to professional services.

A sales tax on services from lawyers, engineers, detectives and other professionals might raise $834 million, while similar taxes on security brokers, credit agencies, insurers and the like could raise an additional $322 million. But those have not garnered public supporters.

Brown also likes an income tax on high-wage earners but says she lacks votes for it.

CONCERNS OUTSIDE THE LEGISLATURE

Like legislative leaders, tax advocates are undecided on the best revenue approach – or amount – said Sandeep Kaushik, spokesman and leader of the Rebuilding Our Economic Future Coalition. It represents nearly 50 groups, including the Washington Hospital Association, the Washington Federation of State Employees, teachers, other labor unions, the state Parent-Teacher Association and advocates for the elderly.

“We haven’t planted our flag around a specific number as a coalition,” Kaushik said. “Certainly, most of the coalition members think the need is great. The $700 million figure that is being batted back and forth we see as a starting point for negotiations, but we think the need is greater than that.”

The coalition plans to turn in 5,000 postcards and at least an equal number of petition signatures to lawmakers Monday. It wants lawmakers to reject Gregoire’s draft proposal for cuts and to look at the whole range of revenue options available. Kaushik said coalition members want to give legislators “a real sense of the impact these cuts are going to have and the harm it will cause both in short-term pain and suffering and also the longer-term impacts to our state’s economic competitiveness.”

Meanwhile, the Association of Washington Business is wary of tax increases that might put a damper on the economic recovery.

“I’m not sure it’s just Republicans. I think an awful lot of Democrats” also have that concern, association leader Don Brunell said. “We’re looking, on average, at a 7.8 percent rate increase on workers’ comp. Some of our folks are seeing a 100 to 200 percent increase in unemployment insurance rates” because of last year’s spike in jobless rates.

“My biggest fear is they set themselves up for a huge increase in 2011-13 – unless there is some way to figure out a way to address the long-term impact of the spending path they are on,” Brunell said of Democrats. “I’m the first one to say it’s not going to be easy.”

If it comes down to taxes and Gregoire is unable to win sufficient federal aid to avoid tax increases, Democrats will have an easier time enacting the increases this year than in 2009. That is because two years have passed since Tim Eyman’s Initiative 960 reinstated a two-thirds vote requirement for tax increases. Democrats plan to suspend or modify that requirement this year with a simple-majority vote, which the law provides.

As a result, Eyman also is expected to be at the Capitol on Monday to file another initiative to require two-thirds votes to increase taxes in the Legislature.

Other tax and revenue ideas also are on the table, at least one of which would require voter approval.

One is a $1.50-per-barrel tax on oil (3.5 cents a gallon on fuel) to generate millions of dollars for stormwater projects that local governments and the Department of Transportation need help with. Among the South Sound backers is Rep. Fred Finn, a conservative Democrat who voted for a version of the bill last year that would have raised about $130 million a year. Finn’s district runs from west Thurston County to Bremerton and borders Hood Canal.

Rep. Hans Dunshee, D-Snohomish, proposes issuing $850 million in bonds to pay for energy upgrades for schools, colleges and public agencies. Dunshee wants to use part of the $190 million in expected yearly energy savings to pay for part of the bonds’ cost, while generating an estimated 38,000 jobs that should produce enough sales tax to pay the remaining bond debt for the first half-dozen years. Dunshee wants to send the measure to voters in November, which would free it from the state debt limit.

Brad Shannon: 360-753-1688

bshannon@theolympian.com

www.theolympian.com/politicsblog

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