State Tax Increases, Spending Could Protect Washington Job Market

January 14, 2010 | Aaron Keating

Washington State is losing an estimated 44,000 private and public sector jobs due to billions of dollars in state budget cuts in 2009 – and further cuts could axe another 33,600, according to EOI’s latest economic analysis. By contrast, a combination of new state taxes and federal aid to fill the state’s budget gap could save up to 30,000 jobs.

Economist Mark Zandi of Moody’s Economy.com estimates that every dollar of state spending generates $1.41 of economic activity. Much of that spending – 62%, or 88 cents – boosts the private sector. Cutting state spending means fewer purchases from suppliers, reduced contracts with service providers, less money from public and private employee paychecks circulating through local businesses – and of course, fewer public services.

Lawmakers in Olympia are now facing down a $2.6 billion revenue shortfall. Using Moody’s numbers, EOI policy director Marilyn Watkins estimates that maintaining spending levels entirely through new federal grants and fund transfers would save the state over 33,000 jobs versus an “all-cuts” budget approach. But if federal aid doesn’t come through, even raising the entire amount through new taxes would save 9,000 to 26,000 jobs, because cuts in state spending hurt economic activity more than tax increases.

Zandi isn’t alone in his assessment. Economists Peter Orszag, now serving as director of the Office of Management and Budget, and Joseph Stiglitz, economics professor at Columbia University and former Chief Economist of the World Bank, concluded that steep reductions in spending and services by state governments actually cause more economic damage than increasing taxes – especially on higher-income individuals who would otherwise save a portion of the money or spend it out-of-state.

So what taxes to raise? Watkins says lawmakers should focus first on profitable multi-state or multinational businesses, thereby keeping money in Washington that would otherwise have been saved or spent elsewhere. Second, extend the sales tax base to goods and services to slow erosion of the state’s tax base and stabilize future revenues. Third, reevaluate business tax breaks: from 1994 to 2008, the Washington legislature passed 185 such special tax exemptions that now cost the state an estimated $2.5 billion in every biennial budget.

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Posted in State Economy, Tax and Budget

Comments

  1. First I would like to say that the governments do not produce any thing, and second out of the total government spending very little of it is counted in to GDP.
    What I think should happen is, go through our state laws weed out laws that are redundant. Quit making new laws and enforce the ones we have. this would save the state thousand per year. Reduce the pay for the governor and state representatives. Like Gregoire and other Dem’s have told CE Os to do.
    The reason that the government has this short fall is that they didn’t react to the economy fast enough, and have gotten into areas of society that they should not be into.
    The state should focus on infrastructure, police, fire, extra. they should not be a collection agency for child support, CPS should go back to just being a placement agency for children removed from homes, by the police, just to name a few.
    Increased taxes will hurt thousands of families, and industries like construction which are cost sensitive. The Families that are hit hard by these taxes will then need to get more assistance from the state and that alone will eat up any revenue gained by the higher taxes.
    Business like mine will not hire more people so they can keep the cost to the client down. people need to remember that S**t roles down hill and eventually it lands on those you are trying to help.

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