Cutting state services will only prolong the downturn

January 20, 2010 | John Burbank

From the Everett Herald

The big debate in Olympia for the next two months will be about public services and public revenues. You can’t have one without the other.

But tax receipts have fallen even more from last year, so that the Legislature is faced with a budget that is $2.6 billion out of whack. To put that in perspective, that is about 15 percent of one year’s budget for the state. That gets piled on top of the cuts from last year, which added up to $3.4 billion.

The debate involves much more than public revenues and public services, however. It is fundamentally about jobs, both public sector and private sector. Thus far the Legislature and the governor have been following a recessionary pathway, with cutbacks of public investments and spending that result in additional losses of private-sector jobs.

Now to be fair, the Legislature and the governor have some uncomfortable decisions to make. But they have already made tens of thousands of people quite uncomfortable through the budget cuts they enacted last year. Putting aside the effects of these cuts on classroom size and the provision of health care, let’s look at the job losses that will result from these cuts.

My colleague Marilyn Watkins, working from data from Mark Zandi, an adviser for John McCain’s presidential campaign, calculates that our state will have lost 44,000 jobs because of the cutbacks in state services from January 2009 through July 2011. That’s because for every $1 not spent by the state, we lose $1.41 in the state economy. Each dollar going to public services goes to a public employee or a private contractor, and then gets spent again in the state’s economy as that employee or contractor pays for groceries, clothes, or even a meal at Denny’s. So the $3.4 billion in public service cuts translates to a $4.8 billion drop in our state’s gross domestic product, which comes out to 44,000 jobs lost.

Running an economy is not the same as balancing a family budget, as some people would have us believe. First of all, when you consider mortgages, car loans, home improvement loans, credit card debt and student loans, very few families in Washington actually balance their budgets. Most of us are in debt, some of us much deeper than others. So let’s put aside the preaching about a balanced family budget that doesn’t exist.

More importantly, public expenditures should increase when the private sector implodes. If government piles on with cutbacks in jobs, it makes it more likely that we will be groveling down in the ditch of this recession for a long time.

Our state can’t go into debt to fund services, but we do have one option left to preserve services and maintain jobs in both the private and public sectors: find the revenue to pay for these services.

Since 1994 the Legislature has voted through 185 tax breaks, credits, loopholes and exemptions that together will drain $2.5 billion from the state’s budget over the next two years. If the Legislature reversed its earlier decisions to exempt security brokers, security services, and custom software from the sales tax, we would regain $178 million just in the next year. That translates to 2,300 jobs for our state economy.

We can and should do more. Currently non-financial corporations (such as Wal-Mart) omit any investment income from the calculation of the receipts on which they must pay a business tax. The state loses almost $300 million a year from this oversight. Our friends in the banking and mortgage sector who helped to bring us the housing implosion (for example, Bank of America and the now-defunct Washington Mutual) enjoy a business deduction for interest earned on residential property mortgage loans. That costs the public about $85 million a year. If the Legislature were to close these exemptions and use the money to maintain state services, we would gain almost 5,000 jobs in the state economy.

It is a tough job our Legislature and governor have this year. They will have to stand up to powerful lobbyists in order to find the resources to maintain public services. But if they don’t, they are just making the recession worse. They can do better than that.

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Posted in Column, State Economy

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