As tax collections rebound, Washington state’s projected $9 billion budget shortfall is cut in half

OLYMPIA — Federal stimulus money pumping through parts of Washington’s economy. Loosened business restrictions. A spike in cannabis sales. An improvement in the real-estate market.

Those factors have — at least for now — improved tax collections and slashed by half what had been a projected $8.8 billion state budget shortfall through 2023, according to a state economic forecast released Wednesday.

The state’s projected shortfall is now approximately $4.2 billion through 2023, according to the Washington Economic and Revenue Forecast Council.

If it holds, the improved economic picture means fewer difficult decisions for Washington lawmakers as they write the next state operating budget. That two-year spending blueprint touches every corner of Washington, funding parks, prisons, K-12 schools, and mental-health and foster-care programs.

But a slew of industries — from hotels and restaurants, to construction and air travel — still struggle, said Stephen Lerch, executive director of the council.

Lerch attributed much of the economic improvement to federal stimulus money, particularly the onetime $1,200 checks and the additional $600 in weekly unemployment benefits, which expired in July.

While forecasters knew about that money in June, “We underestimated those,” Lerch said Wednesday in an interview. “People had more money to spend than we thought.”

Those dollars boosted personal income, Lerch said, and helped lift spending at grocery stores and some other retailers, as well as through online retailers.

Auto sales have also been strong and the real estate market has improved somewhat, according to the forecast. At the same time, revenue from the sales of cannabis has spiked since April.

Such purchases have increased state coffers through a variety of revenue streams, including two of the biggest: the sales and Business & Occupation taxes.

Meanwhile, the state’s unemployment level in August dropped to 8.5% from 10.3% in July, according to the forecast.

Washingtonians, however, may not continue to spend at the same level.

Some of the recent increase might have been one-time items that people didn’t or couldn’t buy early in the pandemic, when thousands of businesses were shut down during Gov. Jay Inslee’s stay-home order, said Lerch.

Meanwhile, Congress hasn’t broken through disagreements between Democrats and Republicans on what should be included in a new round of stimulus funding. An agreement on that package could have ultimately included another round of $1,200 checks, among other things.

And Washington still faces an uncertain economy amid a pandemic that has now killed more than 200,000 people in the U.S.

“Things are better than we thought they were in June,” said Lerch. “But that’s not the same as saying they’re good.”

Lawmakers — who are scheduled to get another revenue forecast in November — will still wrestle with difficult budget decisions when they return to Olympia in January.

And Democratic leaders — who, along with Gov. Jay Inslee, nixed the idea of a summer special session — said lawmakers may hold one after the Nov. 3 election.

“There’s just some initial discussion about the possibility of a special session in November,” House Majority Leader Pat Sullivan, D-Covington, said Wednesday. The idea would be to take up a narrow range of bills, said Sullivan, like appropriating state budget reserves and consider proposed policing reforms.

Wednesday’s forecast now shows a shortfall in the current 2019-21 state operating budget of approximately $2.3 billion — not counting the roughly $3 billion in existing budget reserves.

That projected shortfall is down from the $4.5-billion budget hole that forecasters had predicted in June.

Meanwhile, the new forecast projects a $1.9 billion shortfall for the 2021-23 budget cycle — a budget lawmakers will draft when the return in January. That’s down from the $4.3 billion shortfall that had been predicted in June.

In a statement, Sen. Christine Rolfes, D-Bainbridge Island, said the forecast indicated that, “Washington’s diverse economy is showing signs of resilience.”

“While we will still face many challenges ahead, there are some extremely positive signals for our state’s financial picture in this forecast and it represents an enormous step in shoring up our state’s projected budget deficit,” said Rolfes, the chief Senate Democratic budget writer.

Republicans — along with some Democrats — meanwhile, have been frustrated by the lack of a special legislative session since the onset of the pandemic in March.

The statewide restrictions put in place then to stifle the spread of the virus have since morphed into Gov. Jay Inslee’s four-phase coronavirus recovery plan. That blueprint allows counties to get permission from state health officials to loosen restrictions based on a variety of factors.

Inslee and health officials froze counties from opening up more broadly in late summer, after a spike in cases led Washington to new peaks in the pandemic. The governor’s office recently has continued to ease a handful of restrictions in certain industry sectors, like agritourism — for hayrides and pumpkin patches — and event venues such as conference centers.

In a statement Wednesday, Sen. John Braun, R-Centralia, said a special session was still necessary.

“While the state’s economy is in a better place now than it was during the second quarter, that’s little consolation for the employers who are still stifled by a restart plan that occasionally lurches forward but generally seems to be in a holding pattern,” said Braun in a statement.

“We should be meeting in a special session right now, to reprioritize spending and put the budget on a better course for the nine months left in the biennium,” added Braun, the chief GOP Senate budget writer.