Forecaster Says He Was Led Astray by a Model

Arun Raha, director of the state Economic and Revenue Forecast Council

By Erik Smith

Staff writer/ Your Healthcare Today

OLYMPIA, Nov. 19.—And now it’s $2.6 billion.

            The state's budget trouble got $600 million deeper Thursday as economic forecaster Arun Raha delivered his latest projection of state tax revenue, adding to the $2 billion shortfall lawmakers already knew they faced.

            That means they have to find a way to cut the state budget $2.6 billion next year, raise more money, or some combination of the two. It won’t be an easy task. They already cut state spending by $3.3 billion earlier this year – and majority Democrats in the Legislature say they have no choice but to consider tax increases.

            Raha, the state’s top economist, is the director of the state Economic and Revenue Forecast Council, and by agreement of the Legislature, his forecast is the final word on the amount that lawmakers will have to spend. But Raha said the sluggish recovery from the national recession continues to play hob with his projections. There aren’t any signs of the leveling-off he expected to see by this point. The economy is improving, he said – but the state is unlikely to see an upswing in tax revenue until spring.

             “I should have been more wary of our model,” he said. “This is not the first time I have been led astray by a model. But that had nothing to do with economics. In my defense, I was younger then and unmarried.”

            Sets Up Debate

            Barring any more bad news, lawmakers now know the size of the hole they will have to fill when the Legislature meets in January. How they’ll do it is another matter. Democrats are talking about tax increases while Republicans say tax hikes will slow down the eventual recovery.

            The first move is up to the governor’s office, which will release its budget proposal next month. “I think I said last time that everything was on the table,” said budget director Victor Moore. “I just think I need a bigger table now.”

            As is traditional, the governor’s office will make a budget proposal that contains no new taxes – meaning whopping cuts for social services, higher education and other programs.

            Not that the cuts will come to pass. The governor’s proposal is just the starting point. The Democrats who control the Legislature by a wide margin are talking about raising money by ending some of the state’s many tax exemptions – though for political reasons they won’t reveal at this point who their targets might be.

            Sen. Rodney Tom, D-Bellevue, said he might also be interested in looking at “sin taxes” – taxes on candy, bakery goods, soda pop and other such items.

            Said Sen. Craig Pridemore, D-Vancouver, “Let’s not forget there’s more than one side to the equation. The budget is not just about taxes. It’s also about the programs that are provided to the citizens who need this help. There are people who are unemployed who are in desperate need of assistance right now. There are children who are growing up who need access to quality education, and who do need health care, and we have people in our prisons who need be kept, and all of these things are true as well. It’s not simply our budget problem, it’s a state budget problem that affects everybody.”

            Count on Republicans to disagree. Said Rep. Ed Orcutt, R-Kalama, “We cannot afford to raise taxes on working families or on businesses that are already struggling. You know, we have to be very careful that we don’t worry so much about our budget problems that we forget the problems of everyday people out there.”

Consumer Confidence Low

            Why such a bleak forecast? Raha said the main problem is that consumer confidence remains low and people are keeping their money in their pockets. That means they’re paying less in sales taxes and businesses are paying less tax on their gross receipts, in the form of the state’s business and occupations tax.

Since his last projection in September, the state has collected $97 million less in taxes than he expected. His new forecast assumes the sluggishness will continue for the next several months. It lops another $663 million from future tax receipts.

In the big picture, the latest projection is not such an enormous drop – more a matter of fine-tuning than a sudden plunge down an elevator shaft. But it all adds up. A year-and-a-half ago, before the Wall Street meltdown and the sudden recession that followed, Raha’s projections for 2009-11 were $5.3 billion higher.

Here’s another way to look at it: The state will take in 3.3 percent less money during the current two-year budget period than it did in 2007-2009. In normal times, the amount increases every year, usually faster than the rate of inflation.

 “This is testament to the gut-wrenching crisis the economy has been through and from which it has yet to fully recover,” Raha said.

Recovery in Spring?

Though a number of indicators seem to demonstrate that the worst is over and the economy is on the mend, Raha pointed out that there is always a lag between recovery and revenue. Right now unemployment in Washington stands at 9.3 percent, and he said he expects it to reach 9.8 percent in spring before it starts coming down again. Consumer confidence won’t recover until the unemployment numbers start looking better, he said. And rising gas prices are a wild card – the higher gas goes, the longer it will take for consumers to start spending again.

“Right now what’s holding us back is that we are facing a crisis of confidence, and that will resolve itself as the unemployment rate starts to decrease.”