"This football team will not improve next year unless medical science perfects heart and brain transplants" — Otto Graham, coach, Washington Redskins, late 1960s.
Washington, D.C., Olympia, and Seattle public executives and legislators will need to display over the next 60 days both heart and brains if they are to meet the most difficult taxing and spending decisions of at least the past decade. If they don't deliver, our economic distress could quickly become worse than at present.
Local media have focused over the past few days on the current session of the state legislature and the tax-increase options that would help reduce a $2.6 billion budget deficit, which probably will be $3 billion before the session ends. But our state is under less pressure than many others. At national level, the challenge is overwhelming. Let's take it from the top.
The problem at national level is perilous: It now appears that economic recovery will be quite slow in 2010, with unemployment still near 10 percent by the end of the year. The federal government has undertaken historic spending, first to rescue the financial system and, then, to generally stimulate the economy and specifically to bail out the automobile and housing industries. On top of that, Congress is expected to pass within 30 days a general remake of the health sector which will increase deficits still further. Next week it will lift the federal debt ceiling by nearly $2 trillion to cover anticipated deficits by the end of the fiscal year.
The administration estimates federal budget deficits of about $1 trillion a year over the next 10 years. By 2026 U.S. public debt is projected to exceed 100 percent of Gross Domestic Product (GDP) — the highest percentage since World War II. The trust funds which pay for Medicare and Social Security will be emptied by 2017 and 2037, respectively.
So-called discretionary spending, including defense spending, can be modified year by year. But if anything serious is to be done about our growing structural deficits, that means dealing ASAP with Medicare and Social Security. The solutions to the Medicare/Social Security problems have been well known for decades: Benefits either must be reduced or related taxes increased. Some of the solutions would not be painful: raising the eligibility age, lifting the limit on income subject to payroll taxes, changing slightly the formulas determining benefit increases, or implementing some of the spending limitations contained in the current health-legislation proposals. But each would be resisted by important constituencies.
President Obama soon will deliver his State of the Union address. In that speech, he is likely to announce his intention to appoint a bipartisan Social Security/Medicare commission to recommend ways to put both systems on a sounder financial basis — probably suggesting its whole set of recommendations to be voted up or down in the Congress, rather than addressed piecemeal. That would give political cover to politicians who already know what the recommendations would be.
Obama, at the same time, may announce his intention to phase out the spending programs that have helped bolster the financial system and economy over the past year. That will be easier said than done, especially in light of the slow pace of recovery now foreseen.
Olympia's challenges are less daunting but still difficult: As you may have noticed, politicians love to bestow benefits and dislike taking them away. (Think of the slogan coined by a Franklin Roosevelt adviser: "Tax and spend; spend and elect.")
A $3 billion budget gap is chump change, compared to that at federal level and in states such as California. But it will not be easily closed. Gov. Chris Gregoire entered her first term pledging not to increase taxes and, moreover, to examine the huge number of "tax expenditures" (i.e., subsidies and loopholes) long ago extended to Boeing, Microsoft, and various other companies and sectors. Those tax breaks, at state and local level, add up to three times the size of the state's biennial budget. But Gregoire did not ask the Legislature to repeal any; in fact, she and they added some.
Moreover, as the economy perked along and tax revenues were generated, state spending increased by a stunnng 31 percent in Gregoire's first term. In 2007 the legislature passed a two-year budget increasing spending at twice the forecasted rate of revenue growth. Interest-group wish lists were implemented. (Among them, a reduction in public-school class sizes, even though national reductions in student-teacher ratios, from 22:1 to 17:1 over the past 30 years, have not been shown to affect student achievement.)
Now the economy is flat, tax revenues are projected to remain flat for at the next three years, and something must give.
Gregoire, in presenting a spending-cut budget as a starting point, has taken the usual path of suggesting cuts certain to stimulate interest-group and media outcries. Cut money for school kids or the disadvantaged? That cannot happen. Nor can the interest-group wish lists, implemented over the last four years, be seriously reduced. Instead, ideas are then floated by legislators and the governor's office for selective tax increases which would allow these worthy programs to continue.
Sunday's Seattle Times contained essays by interest-group advocates and analysts suggesting alternative ways to reduce the looming state budget gap. Paolo Maranan, executive director of the Chldren's Alliance, argued against cuts affecting children. Remy Trupin, executive director of the nominally liberal Washington State Budget and Policy Center, argued for a general sales-tax increase (even though its regressivity would further punish low- and middle-income citizens already having difficulty making ends meet), rather than cutbacks in public spending. Greg Devereaux, executive director of the Washington Federation of State Employees, said state employees already had sacrificed enough. He argued for rollbacks of "tax expenditures" for favored businesses, including those for the Seattle Seahawks and Mariners, precious metals and bullion, meat processors, and dentists. And so on.
Taxing options presently being floated in the legislature include not only a general sales-tax increase but piecemeal increases on candy and gum, bakery products, financial services, cigarettes, and bottled water. A nonresident tax exemption would be repealed.
Thus far only lip-service has been given to repeal of the tax breaks enjoyed by some state businesses and sectors. Legislators see this as just as politically dangerous as, for instance, federal legislators would regard the repeal of tax deductions for medical expenses or home-mortgage interest. There are solid arguments against the tax breaks. But those who receive them would wreak vengeance on officeholders if they were repealed. Rep. Ross Hunter, a tough-minded budgeter, is taking a lead role in the tax-break review. If he steps up, and is persistent, his colleagues may listen.
This could be a moment when not only tax-break repeal but badly needed general tax reform might be put at center stage in our state. Just as Obama is likely to propose a bipartisan commission, at federal level, to propose a Social Security/Medicare fix, so might our governor and legislators agree on a similar state-level panel to recommend steps to establish a fairer, more progressive, more job-and-investment-friendly code for Washington.
Such an exercise, however, would take at least a year. In the meantime, how about a state hiring and pay freeze and reductions in force through attrition; tolls and user fees for present and planned state transportation systems; and implementation of a budgeting system which by statute limits state spending increases to projected revenue increases?
Locally, both Seattle Mayor Mike McGinn and King County Executive Dow Constantine have taken office talking austerity. Now they must walk as they talk.
At both city and county level, hiring and pay freezes and reductions-in-force by attrition could be implemented. General sales-tax increases should, if at all possible, be avoided. Big capital projects should be put on hold. That would mean, in Seattle, moving forward with both the deep-bore tunnel, to replace the Alaskan Way Viaduct, and the Evergreen Point bridge modernization. Both are necessary for public safety.
But it would mean delaying consideration of the expensive Mercer Project and deep-sixing McGinn's ill-advised pledge to expand cost-ineffective Sound Transit light rail to westside neighborhoods not now scheduled for it. Journalists and cultural writers like their light rail ride from the airport to downtown. But the system, by any measure, is far more costly than its transportation benefits justify. A genuine austerity program also would mean no more streetcars beyond the Allentown trolley already running-near-empty from downtown to South Lake Union.
At county level, Constantine and Eastside leaders should set aside for now the planned three-county expansion of light rail. Its crushing prospective pricetag ($23 billion and counting) already threatens to displace not only non-rail transportation but other spending for other public purposes in the decade ahead. Time for a reevaluation.
Hey, folks, the time has long since passed for public spending as usual. We've spent beyond our means at national, state, and local levels. We now have to get real before it all results in a financial collapse deeper than the one of 2009. Some selective tax and fee increases no doubt will be necessary to carry us through the short term. But, longer term, any real solution will require belt tightening. Individual citizens know it in their own lives. Now elected officials must exhibit the brains and heart to take action accordingly. Happy New Year.
