The State’s Budget Crisis Will Fall Hardest on the Poor, the Needy and the Middle Class

Mark McDermott

October 15, 2001

2

Real Family Income Growth by Quintile and Top 5%, 1947 to 1979, U.S.

116%100%

111% 114%99%

86%

0%

20%

40%

60%

80%

100%

120%

140%

Bottom20%

Second20%

Middle20%

Fourth 20 Top 20% Top 5%

Adjusted for Inflation

Source: Mishel, Lawrence and Bernstein, Jared, “State of Working America, 1994-1995”, page 37. Analysis of U.S. Census data.

3

Real Family Income Growth By Quintiles and Top 5%, 1979-2000, U.S

7%13%

18%26%

52%

80%

0%10%20%30%40%50%60%70%80%90%

Up to$24,000

$24,000 to41,000

$41,100 to$61,378

$61,378 to$91,700

$91,700and Up

$160,250and Up

2000 Dollars

Source: U.S. Census Bureau, Historical Income Tables F1 and F3. Percentage increase is the average increase for all families within group. URL: www.census.gov/hhes/income/histinc/f01 and f03.

4

Average Change in Real Family Income by Quintiles. Washington State, 1988 to 2001

-9.4%

36.0%

7.0%

12.4%

28.0%

-15%-10%-5%0%5%

10%

15%20%25%30%35%40%

$17,012 $41,135 $62,995 $96,420 $178,636

Note: Adjusted for Inflation. Pooled average for each quintile meaning the average family income for the poorest 20% of families was $17,012 averaged over the years 1999 to 2001. Their income dropped 9.4% over the since the late 1980s.

Source: U.W. Northwest Policy Center, “The State of Working Washington”, September 2001, page 2. URL: http://depts.washington.edu/npc/SWW.pdf

5

Crisis in Affordable Housing in Washington State and King County, 2000

The U.S. Department of Housing and Urban Development (HUD) defines housing as affordable if it cost less than 30 percent of the renter’s gross monthly income. A HUD “Fair Market Rent” is the rent for a particular type of housing such as a two bedroom, one bath apartment where 60 percent of renter pay more and 40 percent pay less for this type of housing.

In 2000, the Fair Market Rent in King County for a 2 bedroom, one bath unit was $809 per month. 44% of renters in King County could not afford this rent. A worker would have to earn $15.56 per hour full-time all month to have this unit be “affordable”. The state minimum wage is $6.72 per hour.

In 2000, the Fair Market Rent in Washington State for a 2 bedroom one bath apartment was $656 per month. 35% percent of renters in Washington State could not afford this rent. A worker would have to earn $12.62 per hour full-time all month to have this unit be “affordable”.

Source: National Low Income Housing Coalition, “Out of Reach”, September 2000, King County Section, page 1. URL: http://www.nlihc.org/oor2000

6

Hunger in a Land of Plenty

The U.S. Department of Agriculture conducted periodic survey of American households to assess the level of food insecurity and hunger in the United States. Their 1996-98 survey revealed the following:

• 10 million American households (9.7 percent) were food insecure and 3.6 million households (3.5 percent) experienced hunger at some time during the month.

• In Washington State 12 percent of our households were food insecure, the eighth highest rate in the country. Even Florida, Alabama and South Carolina had lower rates

• Our state tied for the 4th highest rate of hunger in the country with 4.6 percent of our households experiencing hunger. Every state with higher hunger rates was much poorer than Washington State.

Source: U.S. Department of Agriculture, “Prevalence of Food Insecurity and Hunger, by State, 1996-98”. URL: http://www.ers.usda.gov/epubs/pdf/fanrr2/index.htm

7

State Welfare Reform Leaves Most Families With Working Parents Stuck in Poverty

• Our state’s welfare reform program, WorkFirst, was based on a belief that requiring recipients to take the first job available would lead to long-term wage increases and economic security. This new policy occurred during the best economic times of the past thirty years.

• The long-term results are dismal. Three years after families left the program due a job, 55 percent of the families’ earnings kept them below the federal poverty line.

• These workers earned substantially less per hour than a similar group of low-wage workers. This earnings gap widened over the three years.

• The program has performed so poorly that the Governor has lowered its goals for earnings increases over time.

Source: Employment Security Department, “Wage Progression and WorkFirst Returns Report for Fiscal Year 2001 Through Third Quarter 2000”, June 2001; and Office of Financial Management, “WorkFirst Performance Report”, Fiscal Years 2000 and 2001.

8

Legislature Mandates Statewide Committee to Examine Current State Tax Structure and Recommend Alternatives to Legislature by December 2002

The Washington State Legislature passed Engrossed Substitute Senate Bill (ESSB 6153) that creates a Committee to examine the current tax system and development of tax alternatives. The committee will determine how well the current tax system functions and how it might be changed to better serve the citizens of the state in the 21st century.

The Committee will examine the elasticity, equity and adequacy of the tax system. Elasticity means how well the system raises needed revenue during economic booms and recessions. Equity means fairness. Adequacy means how well the system generates the revenues needed for the state’s needs.

The Committee will develop multiple alternatives that increase harmony between tax systems of this state and its border states; encourage commerce and business creation; and encourage home ownership. The findings of the study and alternatives developed by the Committee must be reported to the Legislature by November 30, 2000

Department of Revenue, “Washington State Tax Structure Study”, 2001. URL: http://dor.wa.gov/wataxstudy/wataxstudy.htm?noframes

9

Our State and Local Tax System Fails Three Major Tests of a Good System

• Our state has the most regressive tax system in the country. This means the the poor pay a much higher percentage of their incomes in state and local taxes than the well-to-do. We have the worst record in the nation.

• Our state’s tax system which is heavily dependent on sales taxes tends to see revenues plummet during recessions which is the time that the demand for services increases due to rising unemployment. This flaw creates deep budget crises during recessions.

• Our state’s tax system does not generate adequate revenue to meet the important needs of our state for quality education, transportation, workforce training and human services.

• What is does do is give the well-to-do the lowest state and local tax rates in the nation.

10

Percentage of Family Income Paid in State and Local Taxes, Washington State, 2000

14.8%

10.5%8.7%

7.7% 7.1% 6.7% 6.3% 5.6% 5.4% 5.3%

0%

2%

4%

6%

8%

10%

12%

14%

16%$1

5,00

0

$25,

000

$35,

000

$45,

000

$55,

000

$65,

000

$75,

000

$100

,000

$125

,000

$150

,000

Source: Washington State Department of Revenue, Tax Incidence Model, August 2, 2000.

11

Comparing Our State’s Regressive Tax System with the Progressive Tax System in Delaware, 1995

0%2%4%6%8%

10%12%14%16%18%

Bottom20%

2nd 20% Middle20%

4th 20% Next15%

Next 4% Top 1%

Washington Delaware

Note: Shares of family income for non-elderly married couples in 1995.

Source: Citizens for Tax Justice, “Who Pays?: A Distributional Analysis of the Tax Systems of All 50 States”, 1996. URL: http://www.ctj.org/html/whopay.htm

12

Washington State’s Tax Burden on Income Groups Compared to the Average of the 50 States, 1995

0%2%4%6%8%

10%12%14%16%18%

Bottom20%

Second20%

Middle20%

Fourth20%

Next15%

Next 4% Top 1%

Washington State United States

Note: Washington data are shares of family incomes paid in state and local taxes for non-elderly couples. U.S. data are taxes on own residents as shares of family income for non-elderly married couples.

Source: Source: Citizens for Tax Justice, “Who Pays?: A Distributional Analysis of the Tax Systems of All 50 States”, 1996. URL: http://www.ctj.org/html/whopay.htm

13

Washington State’s Tax System Does Very Poorly in Generating Revenues During Economic Slowdowns and

Recessions., 1997 to 2005

-20%-18%-16%-14%-12%-10%-8%-6%-4%-2%0%

1977

-79

1979

-81

1981

-83

1983

-85

1985

-87

1987

-89

1989

-91

1991

-93

1993

-95

1995

-97

1997

-99

1999

-01

2001

-03

2003

-05

Revenue Shortfalls as a Percentage of General Fund Appropriations

Note: Numbers are estimated from published chart. 2001-03 and 2003-05 are estimated. 2003-05 assumes a moderate recession. Estimates published on January 5, 2001.

Source: U.W. Fiscal Policy Center, “Washington’s Cycle of Boom and Bust”, Public Finance Notes, January 5, 2001. URL:http://depts.washington.edu/fpc/notes/2001/01.pdf

14

Cumulative Impact of Tax Changes Enacted Since 1994, Washington State

($51)

($237)

($391) ($429)

($621)

($856)

($1,123)($1,173)($1,233)

-$1,400

-$1,200

-$1,000

-$800

-$600

-$400

-$200

$01995 1996 1997 1998 1999 2000 2001 2002 2003

Source: U.W. Fiscal Policy Center, “Despite Budget Crisis, Legislators Propose $977.9 Million in Tax Cuts”, Public Finance Notes, February 27, 2001. URL: http://depts.washington.edu/fpc/notes/2001/03.pdf

15

Initiative 722 Valuation Cap Shifts Tax Burden from Rich to Poor, 2000 (Implied Tax Liability Change by Assessed

Valuation, Calendar Year 2001 Simulation)

$121.25

$11.57 $0.04

($370.29)($400)

($300)

($200)

($100)

$0

$100

$200

Less than $80K $80 to $150K $150K to $300K More than$300K

Source: U.W. Fiscal Policy Center, Public Finance Notes “Initiative 722 Valuation Cap Shifts Tax Burden from Rich to Poor”, December 1, 2000. URL: http://depts.washington.edu/fpc/notes/2000/03.pdf

16

State Blue Ribbon Commission on Transportation Proposes Higher Rates of Taxation on the Middle Class

and the Poor than the Well-to-to, December 2000

0.18%0.30%

1.00%

0.50%0.60%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

Less than$25K

$25K to$50K

$50 to$100K

$100 to$200K

More than$200K

Proposed Taxes as a Proportion of Household Income

Note: Percentages estimated from chart. Awaiting actual data.

Source: U.W. Fiscal Policy Center, “Working Poor Shoulder Cost of Transportation Tax Proposal”, Public Finance Notes, December 19, 2000. URL:http://depts.washington.edu/fpc/notes/2000/04.pdf

17

Budget Crisis Comes to Washington State, Fall 2001

• Prior to the September 11th tragedy, the State’s Forecast Council created its September 2001 Economic and Revenue forecast for the state. It forecasted that revenues for the current state biennium (July 2001 to June 2003) would decline for the first time in 20 years.

• We know that the impacts of September 11th will make this forecast even worse thereby helping to deepen the worst state budget crisis in 20 years.

• Seattle P-I - October 3, 2001. “The Locke administration is girding for budget cuts of as much as $1 billion , including probable state government layoffs.”

• Who will bear the brunt of the budget crisis?

Source: Office of the Forecast Council, “Washington Economic and Revenue Forecast”, September 2001, page 42. http://www.wa.gov/ofc/pubs/sep01pub.pdf

Seattle P-I, “Locke Girds for Budget Cuts”, October 3, 2001, page 3.

18

Governor Locke says he wants to shield public schools and colleges from the budget cuts of up to $1 billion,

October 3, 2001. What’s left?

$6.20

$1$0.35

$2.50

$0$1$2$3$4$5$6$7

DSHS Corrections NaturalResources

All other

Remainder of State General Fund excluding public schools and colleges (in$billions)

Washington State Senate Ways and Means Committee, “2001-03 Operating And Capital Budget Highlights and State Summary Totals”, June 20, 2001. URL: http://leap.leg.wa.gov/library/SWMBudDoc/SummaryAsPassed.pdf

19

The Budget Crisis Will Fall Hardest on the Poor, the Needy and Low and Moderate Income Working Families

• “None of the scenarios we are looking at right now calls for a tax increase. The state will manage its way out of the budget crisis.” Governor Locke, October 3, 2001, Seattle P-I.

• Lets be direct. The budget will balanced on the backs of the poor, the needy and low and moderate income working families. Why? The Department of Social and Health Services makes up 60 percent of the remainder of the state budget after the public schools and the colleges are exempted.

• The Department of Corrections makes up about 10 percent of the remainder. Will they be cut?

• The remainder of the entire state government makes up the final 30%. To save a billion dollars, one-third of state government would be eliminated to make up the billion dollar shortfall.

20

Economic and Social Justice in our State’s Budget Crisis

• The low and moderate income families in our state pay substantially higher rates of state and local taxation than the upper middle class and the wealthy.

• The poorest 20 percent saw their incomes drop in the last 10 years. The next 40 percent saw their incomes grow slowly.

• These groups will lose key services and benefits with budget cuts.

• Why don’t we see proposals to raise taxes on the sectors in our state have seen their incomes rise very rapidly in the past 10-20 years?

• Taxes should be raised on those who are best able to pay and currently pay a much lower rate of taxes than the middle class and poor.

• To do otherwise is to further harm those least able to meet basic human needs.