Article by Erik Smith. Published on Friday, November 18, 2011 EST.
New Revenue Forecast Predicts Taxes Will be Down $122 Million – But Legislature’s $2 Billion Nightmare Doesn’t Deepen
Arun Raha, director of the Economic and Revenue Forecast Council.
By Erik Smith
Staff writer/ Washington State Wire
OLYMPIA, Nov. 17.—Things didn’t get any worse for the state Thursday when top economist Arun Raha released his latest revenue forecast. And the way things have been going the last few years, that’s good news.
Lawmakers still will have a $2 billion problem on their hands when they return to Olympia for a special session Nov. 28. But for the first time in what seems like eons, this latest revenue forecast isn’t any worse than the last – at least in any significant way.
But Raha also said there’s a 40 percent chance the economy may plunge again.
Actually, if you want to get persnickety about the details, the latest forecast is slightly worse. The latest projection indicates that Washington will receive $122 million less in tax revenue during the 2011-13 budget period than Raha had predicted in the last forecast, back in September. But it’s nothing like the half-billion or billion-dollar plunges that have come with most of the revenue forecasts since the fall of 2008.
And the key thing is this – lawmakers have been talking about a $2 billion problem ever since September. There was a big fudge factor built into that number. So the key budget-writers still say it’s a $2 billion problem.
“You can call it whatever you want,” House Ways and Means Chairman Ross Hunter, D-Medina, said Thursday in response to a reporter’s question. “This is not a material change.”
The Nitty Gritty Numbers
Raha’s forecast, the one on which lawmakers will base their budgeting decisions in the next session, indicates that the state will take in $30.2 billion during the 2011-13 budget period, which runs through June 30, 2013.
Lawmakers were counting on $31.9 billion in tax revenue when they wrote the 2011-13 budget last spring. So that’s a total plunge of $1.7 billion since the last legislative session ended.
This might get a little confusing, but it’s not the same thing as the shortfall figure. Lawmakers this year left some of that projected tax money unspent, as a reserve. So the actual amount they are short now stands at $1.38 billion, not $1.7 billion.
So how come everyone calls it a $2 billion problem?
That’s because budget writers are figuring that they have to leave some money in the bank again, just in case the economic news remains as dire as it has for the last few years and the forecasts keep on plunging. It’s not that $2 billion is fixed in stone. But if you count the reserve, the problem is somewhere in that neighborhood. Lawmakers will have to come up with an amount in that ballpark, using budget cuts, tax increases or other forms of new revenue, or more likely a combination of both. Said Hunter, “$2 billion is a nice round number.”
Big Downside Risks
The problem, as always, is that the current recession is the deepest since the Great Depression and economists like Raha in every state have been stumped. Economists just didn’t keep good records 80 years ago, and so today’s economists don’t have the kind of data they can plug into their computer models and predict with any precision how long it will take for the economy to recover. Raha, rather cautiously these days, is saying that things may be on the way back. But then again, everything might fall apart.
“The biggest threat to the U.S. economy remains the sovereign debt crisis in southern Europe,” he said. “If the contagion spreads from Greece to Italy or any of the other countries at risk, and from there to European banks, then U.S. banks are not immune to the peril from the unwinding of losses; nor is the U.S. economy. This is reflected in the recent volatility in equity markets.
“A secondary risk to the recovery is the political gridlock in Washington, D.C. that has fiscal policy sitting it out on the sidelines. This has led to a steady erosion of both consumer and business confidence. Our current economic forecast is very similar to our September forecast, with the same muddle-through conditions for the rest of the biennium, along with a high degree of downside risk.”
40 Percent Chance of Plunge
The way Raha expresses that uncertainty, there’s a 50 percent chance the forecast will come true. There’s a 40 percent chance that things will be worse – that is, a 40 percent chance that his “pessimistic forecast” of a $2 billion plunge will occur. And a 10 percent chance that his “optimistic forecast” or a $2 billion upswing will occur.
“Our latest downward revision of revenue is the smallest of this biennium and much smaller than our last revision,” he said. “I don’t want that to fool anyone into thinking that the risk scenario today is any different than it was in September. It remains the same, heavily weighted towards the downside and completely due to events outside our state. There is nothing we can do to reduce that risk.”
Raha concluded, “I am well aware of the tough task that lies ahead for state legislators and the executive. The forecast that I presented today gives a small glimmer of hope that the worst is behind us. Our last forecast is holding true and we needed to make only a minor adjustment to it. However, I want to remind everyone that we are in the aftermath of the great recession and nothing can be taken for granted. We have been here before in this recovery, only to be sucked back into the mire. I continue to believe that intelligent people will do what is right in Europe and in Washington D.C., so that we don’t slip back into recession.
“None of the outcomes there, positive or negative, seem implausible. Only time will tell.”
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