Thursday Q&A: Reps. Ross Hunter and Ed Orcutt

For this week’s Q&A, I sat down separately with Rep. Ross Hunter (D) and Rep. Ed Orcutt (R) to talk to them about this morning’s revenue forecast, in which it was revealed that the Legislature will have to cut — or otherwise come up with — $2.6 billion in the short Legislative session.

Below is the full text of both interviews, in which each was asked the same questions. I’ve posted the interviews in the order in which they were conducted, with Rep. Hunter first. Enjoy.
Q: Can you put $2.6 billion figure into perspective?

Hunter: Every year, we do a budget. We do a big budget every two years that lasts for the next two years. And then we make corrections on the second year.

This time, something really big happened last session: We had a precipitous drop in revenues. If you do a trend line of the amount of revenue that we’ve taken in over the last couple of decades, the state grows at about 4.7 percent per year. So that means if you had projected that out, just straight line growth, if state revenues came in consistently from year to year and didn’t have wild swings, we’d grow about 4 to 5 percent a year.
That didn’t happen last year. Last year, the amount of money that came in fell. It almost never falls in actual dollars.
The cost of providing exactly the same set of services from year to year is what we start our budget from.  That’s what’s called the current law budget. We looked at that number and the amount of revenue we thought we were going to have. Only now, instead of about a $35 billion budget for these two years, it’s going to be $9 billion less. We lopped off 25 percent of our budget in a two-year cycle.
Some of that is we projected state employees are going to get a raise, we didn’t do that. We’re not going to do it this year.
So, we project how many people will wind up in prison, how many will need unemployment insurance, how many will be eligible for Medicaid? All of the people who are eligible for those services went up. There are more poor people, and they need more services from the state.

So you combine all those things together and (we have of difference of) $9 billion. About a third was help from federal government. And about $3 billion was cut.

This year, we will have to cut $2.6 billion out of the budget in the second year of the two-year budget. Instead of cutting 3 billion in a two year period, we wind up cutting $2.6 billion in a one-year period.
If you assume that we’re even remotely rational, we cut the programs that were less effective last year. So that everything we get into now is better stuff. We’re getting down to the real basics. We look at our education system: The voters approved by overwhelming margins funding for Initiative 728 to reduce class sizes.
Now, $100 million is left (for class reduction) of what was close to $1 billion at the beginning of the biennium.That has translated out to class size increases to about 2 kids per classroom in my district. That’s a big deal.

Q: Gov. Chris Gregoire has seemed more willing this year to discuss taxes. Initiative 960 is two years old, meaning it can be amended with a simple majority — instead of a two-thirds vote. Are lawmakers starting to consider raising taxes as an option? Do you think Washingtonians are in favor of taxes over cuts?
Hunter: People talk about taxes as if it’s a black and white thing. Every year we make changes to the tax code because things change. A lot of the things are about a preference.
Maybe we’re trying to attract data centers for Washington. We look around and say, we don’t get any of this business, I wonder why. We find out the cost for them to do business in Washington is more than Oregon, so all that business and jobs go to Oregon. So maybe we say, they don’t have to pay sales tax on the server if they have $100 million investment or something. Maybe that makes sense.
So that would be a cut in taxes, but probably the state will end up getting more tax revenue from that decision.
Is that a tax increase or a decrease? This is what I do every day and because the way Initiative 960 was written, it puts a sort of bright line test on these decisions that doesn’t really work in the real world. I need to be able make adjustments in the tax code.
I need to address this foolish decision by the Supreme Court that gives a huge tax break to out-of-state food distributors. It’s dumb. We need to get rid of it. We would not have been able to get rid of it under Initiative 960. It will keep jobs in Washington and lower taxes for businesses here. So sometimes these actions that you take in closing a loophole are actually beneficial to business in Washington.

We’ll get opposition from business community about closing a loophole. But the world isn’t actually quite like that. You have to exercise judgment. I think there are a couple of things that have built up. Why did we do this? It made sense 10 years ago, but does it make sense now? No, it doesn’t.

Do I think we’re going to do big consumer tax increases? No. I’d be astounded. I think there’d be a referendum and I think we’d lose.
Anything that we do will be colored by what is the right decision about taxes. Is an increase in some tax rate on some product — is that a better choice than cutting something that people need.

I think there’s a bunch of things to look at. You have to weigh every cut against the revenue and say what is the right choice here. That is what people mean when they talk about the priorities of government.
Educating children is the paramount duty that we have. We need to make sure that all children have access to healthcare. I’d rather take take adults off healthare before I take kids of healthcare. We’ll make those choices and we’ll get elected or not elected in the fall.

Q: Is there anything that can be done in the future to avoid the revenue shortfall the state has experienced over the last year?

Hunter: There isn’t a sensible way to do it. You should plan for reasonably expected outcomes.

When you look at, you have insurance on your house. But you probably don’t have flood insurance, unless you live in the Kent Valley.

But Biblical times may return and you may have a flood and you say, if that happens, I’ll deal with it. This is a 100 year economic downturn. This is worse than anything we’ve had since the Great Depression. This is worse than the 1983 recession, which was until then the worst since the Depression. You can’t create a hedge against this kind of downturn. We should create a hedge to make our revenue system in this state less volatile. And when you get a whole bunch of new money that comes in from taxes, you leave the tax rate the same – you can either save the money, which is really smart, you can spend it or you can give it back in temporary tax cuts.
The first and last examples are the right set of things – save or give it back in temporary tax cuts. I like the saving option, that’s why we created the Rainy Day fund.

(Sen. Joe Zarelli) and I tend to agree that what we could do to smooth out how things get spent. But saving up a lot of money is also hard. If you put more than $1 billion or $2 billion in Rainy Day fund, people start saying you’re taxing them too much.

I was really pleased that we had a half billion dollars in the Rainy Day fund.
For a normal thing, our rainy day fund will dampen the oscillations a little bit. But there is nothing you can do and probably nothing you should do to prepare for this kind of economic downturn.

Anything else?
Hunter: I think we have a hard challenge in front of us. The challenge is about judgment. I am not someone who takes loyalty oaths. I don’t take an oath from the left or the right. I don’t think you can have a dogmatic approach to this problem.

You can’t say, anything that has a positive number is bad. So we are going to have to approach this problem with judgment. We’re not going to be reflexive.

We’re not going to do things that are dumb, I hope. We’ll do whatever is the smartest approach. I’m going to exercise judgment. If people disagree with my judgment, they should tell me. I expect to hear a lot I will do some polling on my web site, which is unscientific, but I want to give people a chance to tell me what they think.

I don’t want to have tea party, but I also don’t want to have a pity party. I think we ought to have a reasoned discussion. We are going to have to have that in a very short time frame – over the next two years we’ll have to have that in a much bigger way. Do we want to be a low tax, low services bad economy state like Mississippi? Or do we want to be a state that’s competitive in the high tech world?
Education and transportation are things that Microsoft and Boeing complain about the most. I hear much more about that from those guys than I do about what the tax rate is. So that’s a discussion that we’re going to have in the state and I think this crisis allows us an opportunity to have that discussion.

And now for Rep. Ed Orcutt.
Q: Can you put the $2.6 billion figure into perspective?
Orcutt: No. There’s really no way to put it into perspective as far as I’m concerned. I think it’s difficult even for legislators to comprehend.
The thing that I’m concerned about is too many legislators are focusing on the impact the economy has our budget, and not enough on the impact it has on families.
You hear some people saying, We need to raise taxes. The problem is, when you raise taxes on the people who do have money, you lose investments.
If you tax capital away from them, what you end up with is more people going on the unemployment lines and you continue a spiraling downward trend. We’ve kind of leveled off and it’s because we didn’t raise taxes. What we need to do is figure out now how to stop the layoffs and get people back to work.
So we’re going to have to go into our budget and fix the systemic problems with our budget and with our service delivery models. How many people do we need to protect our natural resources? Do we need two people doing the same job? Do we need two people delivering the same services? We’ve got to figure out how to get down to the fewest number of people who have the greatest ability to deliver the services.

That’s the first thing we need to do to allow us to get a handle on this.

Q: Gov. Chris Gregoire has seemed more willing this year to discuss taxes. Initiative 960 is two years old, meaning it can be amended with a simple majority — instead of a two-thirds vote. Are lawmakers starting to consider raising taxes as an option? Do you think Washingtonians are in favor of taxes over cuts?

Orcutt: I don’t think it’s changed for anybody. I think there are those who are more willing to talk about what their true beliefs are. I think those on the other side of the aisle are going to be talking more about taxes this year than they have in the past. And I don’t know whether they’ll get into tax increases this year or whether they’ll extend the two-thirds vote requirement this year so they can extend taxes next year.

To me, it is very problematic that they can use a majority vote to get rid of a two-third vote requirement. It is problematic.

They may do some sin taxes but I don’t know if they’ll do tax increases. It certainly is a difficult time to do tax increases. My recommendation is do not increase any tax because it is money coming out of the economy. Whether you’re taxing cigarettes, whether you’re taxing candy, whether you’re taxing businesses: You’re taking money that could be spent in the economy out of the economy. And that ultimately leads to more unemployment.

I think the sooner we address the budget, the better. I think we should have our budget writers, Democrat and Republican, House and Senate, sitting down and working on some things to at least give us some ideas for some initial budget adjustments. We should at least get some things done so that we get 18 months of benefits rather than trying to cram all the reductions into 12 months.
Before this forecast, you would have had to cut $66 million per month for 18 months. If you shrink that to 12 months, you’re cutting $100 million per month. And that just gives an example of how much deeper you have to cut the longer you wait, and that affects more people.

Q: Is there anything that can be done in the future to avoid the revenue shortfall the state has experienced over the last year?

Orcutt: I try to help people understand that there’s three ways we balance budgets. The first way, which we do pretty well, is balance against expenditures and revenues. Then, we balance against competing interests within the budget. The third thing is balancing budgets against the biennia. And we don’t do that at all.

If you get on a sustainable path with your budgeting and then you take all of the excess revenue and put it into the Rainy Day fund — Zarelli has got a good start with his Rainy Day fund, but in reality you don’t get enough into that to cover the down times. And you still leave enough of the excess revenue to be spent on new programs that further compound the problem. That’s part of the budget problem that we had last year, certainly the economy had an effect, but there are things that we can do to make the severity of these things far less than what we’re feeling right now. And that’s by balancing budgets across biennia, and start getting a look at what have our trends been in revenues and start saying, this is what your 10-year rolling average is for revenue. And if we have revenue above that, it gets set aside. It’s got to be in a Constitutionally protected account, so it can’t be spent by initiative.

And you have to do it in a Constitutionally protected fund so that people don’t come back and say we need to use that money somewhere else.

What we ended up having with the housing bubble was, there were so much capital out there that people wanted to invest in 2004, ‘05, ‘06 – I think the only way they could get that money lent out was to do risky loans, which are now failing. So you can only borrow from the future for so long. You can’t sustain that rate of housing sales that we had during that period. So now we’ve got the crash. We were saying it for years – probably for the last two or three years – that this bubble’s going to burst. We were just wrong as to when it’s going to burst. It burst later than expected. Some of the auto dealers are seeing the same thing with Cash for Clunkers – while the (rebate) money was available they bought cars.

Now, a lot of these folks are seeing their auto sales drop. I’ve talked with one of my car dealers who said since Cash for Clunkers, we’re doing very little business. Now we’re borrowing from the future and that can come back and bite us if we don’t account for that adequately.

So I think we did know this was coming. I don’t think we knew it was going to be this bad, but we knew it was coming.

Let’s not forget 1980. The issue there was, we had housing markets going great guns and then it crashed. I don’t know that what we’re seeing now is that unprecedented. I think we’ve seen it before and we just failed to learn from history.

Could we have totally prevented it? I don’t think so. Could we have lessened its severity? Absolutely.

Q: Anything else?
Orcutt: I fear that the Democrats are going to use the simple majority to suspend the two-thirds vote requirement (for Initiative 960) and I feel that there is a tax increase in the future. Any tax increase I think leads to more layoffs or delays employers’ ability to bring back employees. I think consumer confidence will start to return when the employees start seeing people have been laid off come back to work because then they’re not going to be as worried that they’re going to be laid off.
I think that’s going to be more important. And that’s a little ways away.

I really wish there was something I could say to spur consumer confidence, but if people aren’t working, if they don’t have the money then they just don’t have it. They’re in hunker down mode where they’re saying if we don’t need it, we don’t buy it because they don’t have the money for it. I think there’s a distinct possibility that the impact of this on consumers will last longer than the impact the last recession had. To what extent and to how long, I don’t know. But I think we have to readjust our thinking as legislators to not rely on booms and then go to the taxpayers in the busts. And I think we need to start figuring out what are the most important services, who are most in need of those services and how do we most effectively and efficiently deliver them.

If we really try, there’s a lot of that we can do. And it shouldn’t be done in two months. People should be starting to do it now. People are putting ideas for legislation now. Budget writers should have been sitting down a long time ago.
I think we’re at a point now where they should have a product for us and should have it in an adequate format that we can do something with it. I don’t think that’s going to happen. Unfortunately I don’t think they’ve been working on the budget issues. That’s what really needs to happen, and it needs to have happened yesterday.
We need to solve this budget problem the right way to minimize the impact on the families of the state of Washington. And if we do it the right way, we’ll all be better off. If we do it the wrong way, we’re all in a lot of trouble. We really need to start working on the service delivery issues first.

Do we need as many people as we have in Olympia to deliver the services in our communities? That’s the place that we need to look at first in shaving off the 2. 6 billion from our budget. And you do that before you start making cuts in programs.

Tags: Budget, Q&A, revenue, taxes