Washington Policy Center Blog

Committee adopts increased state spending limit

The state Expenditure Limit Committee (ELC) met today to adopt the spending limit for the 2009-11 budget. This was the first meeting of the ELC since the state Supreme Court ruled on the I-601 case and whether or not the legislature violated the law in 2005.

Prior to a change in 2005 by lawmakers, the spending limit was allowed to increase based on a three-year rolling average of increases in population and inflation (fiscal growth factor). That calculation was changed for the current budget to the ten-year average growth in state personal income. It was argued at the time that this change would allow the budget to grow at a much faster rate than under the limit original adopted by the voters in 1993 with I-601. Based on today's committee action, this fear has been realized.

Under the new spending limit the budget is allowed to grow to $32.9 billion in 2007-09 and $36.4 billion in 2009-11. This translates to a possible 11 percent increase in spending. Prior average increases under I-601 were 9 percent (including the large budget increases since 2005).

One positive development from today's ELC meeting, the committee adopted a proposal offered by OFM director Victor Moore to stop doubling counting appropriations from the general fund to related accounts for the current budget (meaning the money can't be counted as spent twice to artificially increase the limit). This has the effect of reducing the increased spending limit by $128 million for the 2007-09 budget. This issue was also addressed for future budgets by the recent passage of I-960.

I-601 had been working well controlling state spending increases before the legislature's changes in 2005. Lawmakers should consider returning to the original fiscal growth factor adopted by the voters to help mitigate the increased tax burden associated with a fast growing budget.

Updated (1:40 pm): Rep. Gary Alexander (the lone no vote at today's ELC meeting) released the following statement:

“Today’s decision by the Expenditure Limit Committee is disappointing. I voted ‘no’ because the state should not be manipulating its appropriations process in order to avoid the voter-approved spending limits of I-601. The majority party has, first, made hundreds of millions in appropriations to other accounts for fiscal year 2007 and counted them as expenditures when they’ve not actually been spent, and claimed that this allows them to keep the spending limits higher. Second, they’ve shifted hundreds of millions of dollars in spending for services historically funded from the general fund to an account not covered by the limit, without lowering the limit for the shift as required by law. This is not what voters intended when they passed I-601, it does not restore integrity to our budget process, and it is not in the best interest of our state financially.” 

Special session update

The House just passed the bill restoring I-747 by an 86-8 vote.  Those opposed include Representatives Dickerson, Hunt, Nelson, Pedersen, Pettigrew, Santos, Simpson, and Sommers.

The Governor's second request bill, the property tax deferral proposal, faces a rougher road to passage. Serious constitutional questions were raised against the deferral bill with almost universal opposition expressed by those testifying at the House and Senate hearings.

For a split second it appeared the deferral bill was no more as the Senate Ways and Means adopted, by a 10-7 vote, an amendment offered by Sen. Hobbs to turn the bill into a study. That vote was quickly followed by a request for reconsideration, however, and the amendment failed 8-9 on the re-vote.

It is becoming likely though that if the deferral bill does pass the legislature today it will be in the form of a study as suggested by Sen. Hobbs.

WPC Vice President of Research, Paul Guppy, testified at both hearings. Here is his review of the deferral proposal: Analysis of the Property Tax Deferral Bill

Updated (7:15 pm): The Senate just passed the bill restoring I-747 by a vote of 39-9 making it a done deal. Those voting against the proposal include Senators Fairley, Jacobsen, Kline, Kohl-Welles, McDermott, Murray, Pridemore, Spanel, and Weinstein.

The Governor's property tax deferral bill was also adopted today. The closeness of the vote, however, illustrates the unease some lawmakers had moving forward with a controversial bill on less than a day's time to review the details. In fact, Rep. Kathy Haigh (D-Shelton) told The Olympian:

“I admit I don’t really know all the implications. I’m going to try to keep my head down and I’m going to vote as my caucus needs me to. On the surface it sounds good.’’

The Senate vote was 27-21 in favor and 55-39 in the House.

Legislative correction?

In a recent policy note, I wrote how Washington no longer prioritizes congestion relief when spending transportation taxes. In the report, I pointed to the passage of SB 5412, which resulted in a colossal shift in policy. Among other things, the bill repealed certain benchmarks on relieving congestion.

Today, in an attempt to reimpose these benchmarks, Sen. Pflug and Sen. Swecker proposed a new bill, SB 6176, which would help strengthen the tie between spending and traffic relief.

Some of these goals include:

No bridges shall be structurally deficient, and safety retrofits shall be performed on those state bridges at the highest seismic risk levels.

Traffic congestion on urban state highways shall be significantly reduced and no worse than the national mean.

Delay per driver shall be significantly reduced and no worse than the national mean.

Administrative costs as a percentage of transportation spending shall achieve the most efficient quartile nationally.

The state's public transit agencies shall achieve the median cost per vehicle revenue hour of peer transit agencies, adjusting for the regional cost-of-living.

Since the original bill that repealed this language passed nearly unanimously, its hard to judge how successful this new bill will be. Nevertheless, at least two legislators recognize the mistake.

 

Seattle columnist criticizes WPC

Seattle P.I. columnist Joel Connelly criticized the Washington Policy Center in his column this morning.  Here's the note I sent him in response.

Joel, I read with interest your column today. I assume your mention of "Washington Policy Institute" refers to us. Not surprisingly, I don't share your view that public officials have had to starve essential services because of I-747. Our research into the numbers simply doesn't back this up.

Even with the 1% limit on one type of property tax revenue, our research has found that the state and most local governments have plenty of money to pay for their core services. For example, state general fund spending has increased from $22.5 billion in 2001 to $29.6 billion today, more than inflation plus population growth. Property tax revenue alone has increased 15%, sales tax revenue is up 45%, B&O tax revenue is up 47%; all in only six years. We've found the same trend at the city and county level; i.e. Seattle's general fund spending is up 36%, 2001 to 2007, even though the city's population has been essentially flat for decades; King County's spending is up more than 30%.

Since the hard-working people of our state are already providing ample financial resources, don't they have a right to expect elected officials to manage their money a little more wisely, by funding top-priority services first, and using long-term planning to tackle lower-priorities? Instead, the people seem to get exactly the opposite - elected officials fund routine, low-priority programs first, especially those that benefit powerful interest groups, then turn to the people and ask for yet more money. Seattle Mayor Nickels' promotion of the special street repair levy is a good example of this trend. I think that until state and local leaders become better stewards of the large amounts people are paying now, Eyman's limit-taxes message will always find an eager audience in this state. Alternatively, any believable signal from elected officials that they are willing to ease up on the financial burden they place on citizens every year would take a lot of the steam out of Eyman's message. - Paul.

Tax relief opponents threaten public service cuts

 City Council president Nick Licata says a 1% limit on property tax increases means “...important service like police, fire, transportation and human services are at stake” (Seattle Times guest op-ed today, "Capping property-tax increases at 1% is a bad idea,")  This is a common threat made by public officials who oppose limits on increases in their annual budgets. Six years ago, tax-relief opponents said voter approval of I-747 “could cost lives.” In reality, Seattle citizens are providing ample tax revenue for city coffers, paying core taxes on top of a dozen special levies. Under our current leaders the tax burden only goes up – it never goes down, even though the city’s population has been flat for decades. As a result, city spending is up 36% since I-747 passed, with the largest public payroll ever. If the 1% limit is passed and city officials follow through on their threat to cut vital public services, it will not be for lack of money. The public will suffer only if the Mayor and the City Council choose to starve these services by diverting current revenues to lower-priority programs.

Nickels is No Saint

Just when you thought the debate over global warming couldn't get any sillier, we are reminded that there is always a ready supply of clown shoes and funny red noses.

During last week's Christmas parade and tree lighting ceremony, Seattle Mayor Greg Nickels complained that Santa was in danger from shrinking Arctic ice due to man-made global warming. They actually handed out stickers admonishing people to "Save Santa." He told kids in the audience that he hoped "reindeer can swim." (Note to Nickels children: no video games this Christmas for you!)

Not only is this a shoddy and silly political appeal, it isn't even correct.

A study released earlier this month by NASA's Jet Propulsion Laboratory and led by a UW expert found that changes in the Arctic ice cap were likely unrelated to greenhouse gases. University of Washington researcher James Morison commented that "Our study confirms many changes seen in upper Arctic Ocean circulation in the 1990s were mostly decadal in nature, rather than trends caused by global warming."

Additionally, one recent report in the Norwegian newspaper Aftenposten says that one moose, which is in the same family as reindeer, can produce as many greenhouse gases in one year as a car traveling 8,000 miles. Perhaps Santa should go with four reindeer or look for carbon offsets.

Santa had a few things to say as well. You can read them in our press release.

I can only imagine what the Mayor has prepared for Groundhog day.

Tax increases in 2009?

With the focus of this week's special session being relief from property tax increases, it is odd to hear the governor already talking about the possibility of future tax increases. According to The Olympian:

Gregoire later told a gathering of service clubs Monday — including Olympia Rotary — that she thinks voters did not merely reject taxes on Election Day.

The governor noted that voters approved all four measures the Legislature put on the Nov. 6 ballot — including the “rainy day” savings account for government and lower vote requirements for passing school levies.

Voters will support taxes if they are confident about what the money is going for, Gregoire said. She hearkened back to the phased-in gas tax package of 9 ½ cents that lawmakers approved in 2005; it survived a citizen initiative to repeal it.

“I have not lost confidence that if we’re in tune with the public, they’ll invest,” Gregoire said of future tax increases for education or transportation.

It is very unlikely that any tax increase proposals will be considered in 2008 until after the election but the governor's comments telegraph a willingness to increase taxes.

One ballot measure the voters approved the governor didn't mention, I-960, makes it probable the voters will have the final say on any tax increases via a referendum since 2/3 legislative support is unlikely.

Legislature should re-enact 1% limit, and protect taxpayers by phasing out the state property tax

Washington Policy Center recommends that lawmakers do three things during this week’s special session:

1. Re-enact the voter approved one percent property tax limit just as it was before the Supreme Court overturned I-747;
2. Enact a permanent reduction in the state property tax, and;
3. Repeal banked taxing authority.  Local governments should not be permitted to save up taxing authority over time, then suddenly tap this “banked” capacity to impose greater-than-1% property tax increases on citizens.  If local officials feel they need control over more revenue, they can always take their tax-increase request to the voters for approval.

“Opponents of I-747 said it would harm vital public services and that it could cost lives.  Our research shows the critics were wrong.” says Paul Guppy, Vice President for Research at Washington Policy Center. “Limiting tax increases and cutting taxes serve the public interest by freeing up money for investment and job creation, helping elderly people on fixed incomes, and increasing take-home pay by allowing working families to keep more of what they earn.”

“Imagine a world in which your property taxes actually went down,” Guppy adds.

Ways lawmakers can reduce the property tax burden include:

Permanently cut the state property tax – The state tax makes up about 25% of most people’s yearly property tax bill.  Lowering the amount of money the state takes from citizens would bring real and long-lasting financial relief to homeowners and business owners across the state.

Phase out the state property tax over five years – Tax money flowing into the treasury is increasing at a yearly rate well beyond population growth plus inflation.  In fact, state spending is up 30% over four years.  Phasing out the state property tax would protect taxpayers while maintaining ample revenue to pay for public services.

“Restoring I-747, while essential, will mitigate the impact of future property tax increases – not reduce current taxes,” says Jason Mercier, Director of WPC's Center for Government Reform. “Lawmakers should use the special session to give Washingtonians an early Christmas present by permanently reducing their property tax burden.”

About that retroactive I-601 "cure"

Today's ruling by the state Supreme Court let the legislature off the hook for its 2005 violation of I-601 by saying lawmakers retroactively "cured" the problem by passing ESSB 6896 in 2006. It's too bad the Court didn't take the same position of the trial court on this matter:

The Court declares that ESSB 6896 (7)(6) providing that "In calculating the expenditure limit for fiscal year 2006, the calculation shall be the expenditure limit established by the state expenditure limit committee in November 2005..." must be construed as referring to said expenditure limit as modified by this Court.

In other words, the trial court said the changed limit would have to take into account the 2005 violation of law. Apparently this concept was too radical for the state Supreme Court to agree with.

Court punts; I-601 survives

In a long awaited state Supreme Court ruling, the Court today refused to throw out I-601's 2/3 vote requirements for tax increases but allowed the legislature to "cure" its violation of the law in 2005 with a retroactive change to the spending limit in 2006. The Court did not rule on the issues of executive and legislative privilege. Additional details to come. Background below.

I-601 background
In the decade before Initiative 601, state spending rose on average by 17.3 percent per biennium. Since Initiative 601 became law, state spending increases have averaged 8.9 percent, almost half the previous rate of spending increase. This post-Initiative 601 average includes the past two budgets adopted under Governor Gregoire, with their combined 25.1 percent increase (30.3 percent NGFS) in spending.  These budgets reflect the higher spending increases allowed under changes the legislature made to Initiative 601 in 2005.

The legislature has amended Initiative 601 twelve times since the measure became law.  While most of these amendments were minor, the legislature has suspended the two-thirds vote requirement twice (2002 and 2005) and enacted major changes to the way the spending limit is calculated on four occasions (1998, 2000, 2005 and 2006).  These changes resulted in the limit being calculated to allow a higher level of spending increase.

The major legislative amendments to Initiative 601 are:

• 1998 – While reenacting and reaffirming Initiative 601, Referendum 49 allowed diversion of Motor Vehicle Excise Tax revenues (car tabs) without lowering the spending limit.
• 2000 – Creation of “two-way street” loophole (the subject of current litigation).  This allowed the spending limit to be increased for program costs or money that is transferred into the state general fund.
• 2002 – Two-thirds vote requirement for tax increases and expenditures from emergency reserve suspended for 2001-03 biennium.
• 2005 – Two-thirds vote requirement for tax increases and expenditures from emergency reserve suspended for 2005-07 biennium.  Effective with the 2007-09 biennium, the fiscal growth factor is changed from the current three-year rolling average of population increase and inflation to the ten-year average growth in personal income.  “Two-way street” loophole is narrowed by discounting the impact of transfers between the state general fund and related funds.
• 2006 – The spending limit assumed for the adoption of 2005-07 budget in 2005 is re-affirmed by the legislature.  This action was an attempt by the legislature to end a lawsuit filed against lawmakers for violating Initiative 601 in 2005.  The status of this litigation is described below.

Case background
Although the legislature suspended the supermajority vote requirement for tax increases in 2005 for the 2005-07 biennium, it did not suspend Initiative 601’s requirement that if tax increases would result in expenditures above the spending limit, voter-approval is required.  This fact is the basis for a lawsuit filed in 2005 against the legislature for violating Initiative 601.

The lawsuit was filed by the Washington State Farm Bureau, Washington State Grange, National Federation of Independent Business, Building Industry Association of Washington, Evergreen Freedom Foundation, Washington Association of REALTORS, and Snohomish County taxpayer Steve Neighbors.

In 2005, the legislature enacted approximately $400 million in tax increases with a simple-majority vote and without voter-approval.  The largest of these tax increases were:

• Cigarettes – $175 million
• Death-tax – $139 million
• Liquor – $47 million
• Extended warranties for product repairs or replacements –  $37 million

Though a two-thirds vote was not required for these tax increases due to the legislature’s suspension of the law, voter-approval was still required if the tax increases would result in expenditures in excess of the spending limit.  The lawsuit filed against the legislature in 2005 argues the tax increases were above the spending limit and therefore in violation of the law since they did not receive voter approval.

In March 2006, Snohomish County Superior Court Judge James Allendoerfer ruled the legislature did violate Initiative 601 when it adopted the 2005-07 budget and enacted several tax increases without a vote of the people.  This case was appealed to the state Supreme Court. 

Judge Allendoerfer ordered the state to reduce its spending for the 2005-07 budget and invalidated most of the tax increases until ratified by a vote of the people.  His order was not in effect while the case was on appeal. The death and cigarette taxes survived on a technicality.  Initiative 601’s provisions at the time applied only to the state’s general fund.  When enacting the death and cigarette taxes, the legislature dedicated the revenue to an off-budget account, which was not subject to the Initiative 601 limit.

When issuing his ruling, Allendoerfer said:

“Here, the legislature exploited a loophole in I-601 for the express purpose of artificially increasing the expenditure limit so as to avoid a vote by the people on the new taxes included in the biennium budget.  The loophole, designated ‘triangulation’ by the plaintiffs, and referred to by legislative staff as a ‘huge loophole,’ and the ‘magic three-for-one provision,’ has the potential of trumping the intent and spirit of I-601 altogether.”

The heart of the case focused on the “two-way street” loophole adopted by the legislature in 2000 and whether money could be spent twice to increase the spending limit.  In an attempt to raise the spending limit high enough so that the taxes adopted during 2005 would not be subject to a vote of the people, the legislature:

• Transferred $250 million from the Health Services Account to the General Fund State; then,
• “Appropriated” $250 million from the General Fund State to the Violence Reduction and Drug Enforcement Account; and finally,
• Transferred $250 million from the Violence Reduction and Drug Enforcement Account back to the Health Services Account.

The effect of this merry-go-round treatment of $250 million was an artificial increase in the spending limit high enough to avoid triggering the public vote requirement for the new taxes enacted in 2005.  During oral arguments before the state Supreme Court, Justice Susan Owens referred to the budget maneuvering by the legislature as a “shell game” designed to avoid a vote of the people.