Blame Placed on Subpar Sales Tax, Capital Gains and Filing Fee Revenues
Washington’s legislature faces a massive budget hole because revenue collections aren’t keeping pace with spending levels. Oregon has the opposite situation with revenues continuing to exceed projections.
The Columbian reported this week that the Washington House Appropriations Committee was told the state’s projected deficit is $4.35 billion in the 2025-27 biennium and $6.7 billion in the following biennium.
Mary Munroe, the committee’s budget coordinator, said the economy is on solid footing, but is generating lower sales tax receipts as consumer spending slows after a post-pandemic spike. She added that home sales are down and the state’s capital gains tax, which survived a repeal initiative, isn’t fetching as much as predicted.
The result: $1 billion less in revenue than what lawmakers counted on last session.
In contrast, Oregon lawmakers recently received a revenue report projecting an additional $1 billion is available to spend in the upcoming biennium. And that’s after reserving $1.4 billion for anticipated kicker tax refunds distributed in 2026.
Outgoing Washington Governor Jay Inslee is proposing a tax on wealth above $100 million to plug the projected budget deficit and avert deep spending cuts. According to The Associated Press, the wealth tax would affect approximately 3,400 Washingtonians, including Microsoft founder Bill Gates, and yield $10.3 billion over four years. The projected revenue shortfall over the next four years is estimated at $16 billion after negotiated cost-of-living wage increases from state employee contracts are incorporated..
In addition, Inslee proposed fees and tax increases for businesses, spending freezes or delays in implementing new programs, transfers from other accounts such as the Public Works Assistance Account, and program cuts in key areas.
CFM Vice President Katie Whittier
“Washington state legislators have enjoyed many years of budget surpluses that allowed them to deliver significant wins across the state,” observed CFM Vice President Katie Whittier who represents clients before the Washington State Legislature. “But as the saying goes: All good things must come to an end. The upcoming legislative session is the year when priorities have to be laser-focused to secure funding – or even preserve it. For our clients, 2025 will be as much about protecting past wins as about looking to the future.”
Two States, Two Different Tax Systems
The sharp difference between the Washington and Oregon revenues can be traced to the different tax structures. Washington relies on consumer taxes while Oregon gets most of its revenue from income taxes on individuals and businesses.
Inslee acknowledged the difference. “Washington, which does not have an income tax, is considered to have one of the most regressive tax systems in the country, meaning lower-income residents pay a larger share than richer ones. Voters in November overwhelmingly upheld the state’s new capital gains tax against a repeal effort, demonstrating a desire to make the tax system fairer.”
He added, “The state has to respond to this inequity beyond human imagination. We cannot survive as a healthy, robust community … while we have this level of poverty and want amidst this enormous wealth.”
Washington legislative Republicans called the wealth tax proposal “unserious”. The Tax Foundation, a conservative-leaning policy organization, describes wealth taxes as “economically destructive” by encouraging “perverse tax-avoidance strategies that cut into investment returns.”
The Budget Hole
“Maintenance level” budgets for Washington state agencies would require an additional $11.5 billion in revenue.
As reported by The Columbian, “The Department of Social and Health Services, which serves nearly 2 million people, sought $3 billion more to cover a projected rise in people and families with low incomes receiving cash assistance. There are also costs from greater numbers of people receiving in-home care and moving into adult family homes, assisted living facilities and nursing homes.”
Inslee also proposes delaying the expansion of child care slots and subsidies for low-income families planned under the 2021 Fair Start for Kids Act. Starting in the 2026-2027 school year, the Early Childhood Education and Assistance Program was supposed to become an entitlement program, guaranteeing access to families below a certain income. Inslee’s proposal delays that expansion until the 2030-2031 school year. That delay would save the state about $146 million through 2027.
Under Fair Start, the Working Connections Child Care subsidy program is supposed to expand eligibility to families with up to 75 percent of the state median income starting next July. Inslee’s proposal delays that expansion to 2031. That delay would save the state $119.5 million through 2027.”
The Department of Commerce seeks an additional $403 million to maintain emergency shelter grants, temporary rent assistance and support for homeless youth. “This money comes from fees people pay when they file real estate deeds and other paperwork with county auditors,” The Columbian said. Because of sluggish home sales, filing fee revenue is projected at $505 million, less than the agency’s proposed $908 million budget.
Other Tax Proposals
Majority Democrats are bringing their own revenue-generating ideas to the table by eying a statewide version of Seattle’s JumpStart tax on companies with large payrolls and highly paid workers, as well as considering alternate thresholds for a wealth tax.
Separate from the Operating Budget deficit, the state’s Transportation Budget also faces shortfalls. To that end, some lawmakers are considering a road usage charge to bolster transportation funding, especially highway maintenance.
Senate Republican Leader John Braun
Washington Senate and House GOP leaders are calling for spending restraint. Senate Minority Leader John Braun, R-Centralia, said, “This is a spending problem. We are not in a recession.” House Minority Leader Drew Stokesbary, R-Auburn, advocates “slowing government growth, not adding taxes as the better option.”
Incoming Washington Governor Bob Ferguson is expected to provide budget feedback in the near future, but won’t develop a full budget proposal of his own. In comments to a Seattle Times reporter on December 8, he said he’s not ready to back tax increases just yet and wants to thoroughly review spending first.
