Washington’s budget forecast increases by $762 million despite recession concerns

When government budget forecasters look at the economy, they see the uncertainties of the moment: rising inflation and interest rates, the global impact of Russia’s invasion of Ukraine, layoffs at technology companies, possible railroad and shipyard strikes and a slowing housing market.

Meanwhile, projected tax collections in Washington continue to rise higher than expected.

The figures released Friday by the Washington State Economic and Income Forecasting Board will provide key information as state lawmakers and Gov. Jay Inslee prepare to write a new biennial state budget. This spending plan funds schools, parks, prisons, public lands, the state’s mental health system, and other social services.

Overall, projections for the current two-year budget cycle were nearly $762 million higher than expected, the board said. The state is also slated to bring in about $681 million more than expected in the upcoming 2023-2025 budget cycle — a project lawmakers and Inslee are tasked with working out during the legislative session that begins in January.

As a result, the Democratic-controlled Legislature and Inslee will receive roughly $66.2 billion for the next two-year budget cycle, which begins next July. Lawmakers are likely to consider increased spending on education, mental health services and ways to address Washington’s housing affordability crisis, among other issues.

At Friday’s council meeting, lawmakers and others expressed cautious optimism — but they aren’t sure the revenue gains will continue. Steve Lerch, the council’s director of forecasts, pointed to rising interest rates, fears of a recession and layoffs at tech companies like Amazon and others as potentially hurting growth.

“We still believe things will slow down,” Lerch later added.

State revenue forecasts are improving in part due to strong state sales and business and occupation tax collections. But just like in Seattlestate home seller tax is slightly lower than expected as the housing market begins to cool.

“I think this revenue forecast is better than I expected,” said Rep. Tim Ormsby, D-Spokane and the top Democratic budget writer in the House. However, he called the future uncertain.

It’s been a chaotic few years, with the COVID-19 pandemic disrupting supply chains and forcing people to stay away from work and study at home on government orders or personal health reasons.

However, Washington has seen a rapid economic recovery since then a sharp drop at the beginning of the pandemic — along with federal pandemic relief dollars — allowed lawmakers to increase spending on a host of programs. In the spring of 2021, the Democratic-controlled Legislature and Inslee passed the state’s current biennial operating budget, which spends roughly $59 billion. Even with the recession pandemic, this document is reliable spent about $5 billion more than in the previous biennium budget.

Even as lawmakers return to crafting a new budget, some of the existing plans remain up in the air. The Washington Supreme Court is expected to hold a hearing early next year legal challenge to the law it created a 7% capital gains tax on the sale of assets such as bonds and stocks above the $250,000 threshold. If the court strikes down that tax, lawmakers may have to scramble to plug holes in expected future spending.

Meanwhile, on Friday everyone heard the economic slogan of the moment – inflation. According to one budget official, inflation potentially increases some tax revenues as well as the costs of running the government. Two Republican lawmakers also cited rising prices for gasoline, groceries and other goods as reasons for tax relief for state residents.

Rep. Ed Orcutt, D-Caloma, pointed to rising inflation and rising property taxes as reasons to return some of the tax dollars.

“Somewhere in here we have to figure out some kind of tax break,” Orcutt said. “Because we have a lot of people suffering, property taxes have gone up.”

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