The logic of the unthinkable in Olympia

February 19, 2010 | Marilyn Watkins

From the Puget Sound Business Journal:

Our Legislature’s chief concern as it wrestles with how to close the $2.6 billion budget gap should be protecting and creating jobs. Contrary to what some pundits are saying, the best bet to spur private sector jobs is to raise taxes as much as necessary to maintain state spending.

Last year, the Legislature followed the governor’s lead in adopting a no-new-taxes budget. With an infusion of federal stimulus funds and a healthy rainy day fund, they “only” had to cut $3.4 billion — about 9 percent off what the budget would have been if it had simply grown with inflation and the increase in school-aged children, seniors needing support services, and so forth. Because of the cuts, giant holes were slashed in our social safety net even as people lost income, health insurance and their homes following the economic meltdown.

State spending not only supports school teachers, unemployment insurance counselors, state patrol officers, and other public servants, but also bolsters jobs in the private sector. About 40 percent of state spending goes straight to private firms through purchases and contracted services. And of course, all those teachers and other public employees spend their paychecks, putting even more into local private businesses and sustaining additional jobs.

According to Mark Zandi, economic advisor to Sen. John McCain, R-Ariz., and businesses around the world, each $1 of general state spending results in a $1.41 increase in economic activity. Using that multiplier, the $3.4 billion already cut from our state budget will lower our gross state product (GSP) by $4.8 billion through 2011. In 2008, there was one job for every $109,100 of GSP. Using a simple ratio, the loss in GSP equates to about 44,000 fewer jobs throughout Washington’s economy.

Does raising taxes also cost jobs? Yes, but not as many as the equivalent cuts in state spending. Zandi estimates each dollar of tax increase results in a drop of 32 cents to $1.02 in gross product, depending on whether the tax hike falls primarily on the well-to-do who will reduce savings more than spending, or the general public.

More at the Puget Sound Business Journal (subscription)

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Posted in State Economy

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