Boeing and Microsoft Boom, but Washington State Busts

Arun Raha, Washington State’s chief economist and revenue forecaster, is a good-natured man known for bringing a sense of humor to his job. But three times in the past three years, Raha has been forced to notify state lawmakers of budget shortfalls totaling $1 billion or more. The somber routine has led him to temper his normally light-hearted approach. 

“I’m beginning to get a little tired of going in there and trying to put a smiley face on bad news,” Raha says. “I don’t even try anymore. Now people are just afraid every time I show up for a meeting.”

Raha’s latest budget bombshell arrived on September 15, when he told state legislators that they face a .4 billion deficit , just three months after they passed a balanced spending plan and thought they had left Olympia for the year. Citing the forecast, Governor Chris Gregoire announced she would call lawmakers back for a special session in late November, laying the groundwork for another painful round of spending cuts in a state that has long since grown used to them.

Washington is not the only state facing budget troubles, of course. Almost all states have been forced to cut spending during the economic downturn, and many have done so by billions of dollars. The nation’s largest states, led by California, still face considerable obstacles .

Even so, Washington’s budget crisis stands out. As a percentage of spending, the shortfall is far bigger than those in most other states, and the current two-year budget already relied on $4.5 billion in cuts. State finances, meanwhile, seem to be getting worse while budgets elsewhere improve. Gregoire is asking agency heads to prepare for fresh cuts of up to 10 percent even as officials in Georgia, Kansas, Kentucky, Minnesota, Oklahoma, Tennessee, Virginia and other states report better-than-expected revenues and even modest surpluses.

There is no simple economic explanation for Washington’s collapse. The foreclosure crisis that has crippled Arizona, Florida and Nevada has not reared its head in the same way in Washington, and residents cannot accuse the state’s leading industries of stumbling. In fact, two of the companies most commonly associated with Washington’s economy — Boeing and Microsoft — are doing just fine. Boeing recently started shipping its long-awaited 787 Dreamliner, and its total airplane production is expected to jump 40 percent by 2013. Microsoft this year increased workers’ wages and benefits in what it called “the most significant investment in overall compensation we have ever made.”

Faulting the other Washington

What ails Washington most is that its tax structure is poorly suited for the kind of predicament it faces now. And that predicament can be summed up in two words: consumer confidence.

Raha notes that Washington’s tax collections are actually exceeding expectations at the moment. But in the three months since he issued his previous economic forecast, the world outside the state’s borders has changed, darkening the outlook for the remainder of the state’s two-year budget cycle and raising serious fears among consumers. That is a big problem for a state that has no personal income tax and a 9.3 percent unemployment rate, and draws nearly 60 percent of its overall revenues from consumer sales taxes, including those on cigarettes and alcohol.

The European debt crisis has worsened, causing wild stock market fluctuations around the world. The federal government has seen its credit rating downgraded for the first time. At the same time, the congressional “Super Committee” has shown little sign that it can agree to $1.2 trillion in domestic spending cuts, raising the likelihood of automatic trigger cuts in defense that could hit Washington, a military-dependent state, very hard.

“Usually the things that move consumer confidence (downward) are the unemployment rate and gas prices,” Raha says. “They haven’t changed much, but consumer confidence (still) has started to tank. I think it’s because people are starting to understand that the dysfunction in Washington, D.C., is a detriment to the economy.”

Stalled construction

Out-of-pocket spending on consumer goods tells just part of the story. While Washington is rarely mentioned among the states most affected by the housing bust, it does rely to an unusual extent on the struggling construction industry. Construction represents just 5 percent of state domestic product, but 10 percent of general fund revenues, thanks to an unusual aspect of Washington’s tax structure.

Unlike many other states that levy sales taxes, Washington applies its tax to the labor that goes into home and business construction, as well as to the materials used. With residential and commercial development in a rut for years — about 70,000 of the 210,000 total job losses that Washington has suffered during the recession are in construction, according to Raha — the state has seen a major part of its crucial sales tax base disappear.

Before the recession began in 2007, construction accounted for 20.5 percent of retail sales tax collections, or $1.6 billion, according to Mike Gowrylow, a spokesman with the Washington Department of Revenue. By 2010, that number had fallen to 15.6 percent, or $1 billion.

For the developers, builders, architects, contractors and suppliers who are the face of Washington’s construction industry, the sector’s struggles — and their effect on the state budget — are no surprise. “Everybody’s just barely staying alive,” says Steve Senger, the owner of a construction firm about 90 miles southeast of Seattle and a board member with the Central Washington Builders Association. “Everybody’s working twice as hard for half the money.”

‘Incredibly frustrating’

State government is frequently the target of Washington residents’ complaints — but should it be?

Senger and others in the construction industry, for example, are quick to point to a tough new statewide energy code that will make homes more energy-efficient in the long term, but can add as much as $15,000 to the upfront cost of a new house. The energy code took effect this year and is imposing additional expense on potential homebuyers, who may already be struggling to afford a down payment. The way Senger sees it, state lawmakers’ attitude seems to be, “Let’s take an already tough market and make it nearly impossible for a homebuilder to build a home.”

Some within the legislature agree, viewing their primary role in improving the economy as simply getting out of the way. Ed Orcutt, a Republican state representative, is sponsoring legislation that would impose a moratorium on state rulemaking in the hopes of providing the private sector with more regulatory certainty. “I don’t know what we can do to encourage job growth,” Orcutt says. “But we can do some things to stop discouraging it.”

By and large, however, many state lawmakers have reluctantly come to the conclusion that fixing Washington’s economy, at least in the short term, is out of the state’s hands. State government cannot control what happens in the halls of Congress, and it cannot unfreeze national credit markets or drive home prices upward. Meanwhile, the deep budget cuts that are being planned for later this year are likely to result in more public-sector layoffs, perpetuating the bad news.

The lack of control is “incredibly frustrating,” says Ross Hunter, a Democratic state representative and chairman of the House Ways and Means Committee. Hunter says he regularly gets letters addressing him as “Congressman” and complaining about developments in the nation’s capital, even though he has no more control over national events than his constituents do.

State lawmakers “cannot control macroeconomic conditions,” Hunter says. “I’m not Ben Bernanke.”