Terry Corbell, The Biz Coach
By Terry Corbell
Business Consultant

Do Washington’s Budget Woes Warrant Government Reform?

 

Updated 1o:oo a.m. Tuesday December 15, 2009

“We can’t solve problems by using the same kind of thinking we used when we created them.”                                 – Albert Einstein

 

In applying the logic of the famed Nobel Prize winner to Washington state’s multi-billion dollar budget woes, it would appear government reform is needed for good government. Washington is mirroring California and its budget anguish. However, Gov. Chris Gregoire and state lawmakers say tax increases are necessary to deal with the red ink.

Not so fast say authoritative observers outside state government. Productive steps are necessary to solve the ever-deepening budget hole, which was $2.6 billion in the last forecast despite the massive temporary infusion of federal stimulus dollars.

“At this point, this is a whole new ballgame,” says Jason Mercier, who is the director of the Center for Government Reform at Washington Policy Center (WPC) in Olympia, WA. “Even before the recession, which followed a bubble and fake consumer spending, the spending was not sustainable – this is a reset of spending of what the economy can really bear.”

But Mr. Mercier warns us about a list of suggested tax increases by the Department of Revenue. The agency’s list suggests taxes on tax-exempt credit unions, business and occupation tax increases, and hikes on the so-called sin taxes. The Department of Revenue list was first unearthed by the savvy staff at Everett’s The Daily Herald.

“We need to evaluate services from government,” adds Mr. Mercier. “Increasing taxes during a recession would add economic hardship, while changing the way services are delivered offers part of the solution to closing the deficit without raising taxes.”

WPC’s Communications Director John Barnes issued a press release in April, 2009 stating 32 economists believe tax increases will not lead to recovery.

A Washington political economist also says he is not persuaded about the justification for tax increases.

“First of all, the Governor’s budget is not a serious proposal,” says Dr. Mathew Manweller, a professor of political science at Central Washington University in Ellensburg, WA. “It is what I call a ‘bluff budget.’ She wants a tax increase to cover state services.

“But to get there, she needs to propose draconian cuts to convince people to support a tax increase,” he adds. “In essence, this is a ‘give me your wallet or little Toto gets it’ budget.”

A favorite of businesspeople because he is succinct and accurate in his assessments, Dr. Manweller cites a myriad of reasons for the budget headaches.

“On one level we have very powerful state employees unions,” Dr. Manweller explains. “Their financial demands on the budget in terms of salaries, no-risk pension plans, double dipping, and comparable wage laws are killing us.”

Indeed, at an $83 million cost to taxpayers in 2010, here’s a disturbing headline: Thousands of state workers in line for substantial raises.

Mr. Mercier says another budget problem is the Legislature’s under-funding of public sector pensions.

“They are still skipping payments and must make mandatory pension payments in 2013,” he says. “Government has over promised what the economy can deliver.” 

“Add to that an aggressive environmental lobby that essentially has the DOE and DNR in its back-pocket after the Goldmark election and Jay Manning tenure at DOE, it is difficult to encourage any private development,” the professor says. (He’s referring to Mr. Manning who formerly ran the Department of Ecology, and Peter Goldmark who is Commissioner of Public Lands and who also heads the Department of Natural Resources.)

“We also see a variety of federal mandates that are passed down to states that are passing them down to counties and cities,” adds Dr. Manweller. “More and more revenue is going to what economists call ‘dead weight loss’ or non-productive labor.

“Take those issues, throw in a national economy that is ailing, and you are going to get a struggling economy,” concludes Dr. Manweller.

Budget solutions

Mr. Mercier is among those who contend the budget can be balanced by also taking advantage of the state’s competitive contracting law that’s been virtually ignored since 2002.

“The Legislature and Gov. Locke authorized state agencies to open up public work traditionally held as an in-house government monopoly to competitive bids from the open market,” he points out. “Public employees are encouraged to participate in the bidding process, because the intent of the law is not to benefit private companies, but to secure the best service for the public no matter who does the work.”

The WPC conducted a study of 20 state agencies and guess what?

“In practice, however, state managers rarely exercise their statutory contracting out authority, meaning an important provision of the 2002 civil service law remains largely unused,” says Mr. Mercier.

This raises another question: Why is the state of Washington in the liquor business?

Two State Senators, Tim Sheldon (D-Potlatch) and Curtis King (R-Yakima) have introduced a bill to privatize Washington’s monopoly of 161 stores and 1,469 liquor employees.

Do you find this hard to believe? It’s true. Washington employs nearly 1,500 liquor employees when the private sector would function better. Furthermore, here is Washington’s 2009 personnel report.

As a management consultant who has worked experienced at least five recessions, I know it is not wise to try to tax our way out of a recession. All we have to do is consider the federal tax cuts of 2001 and 2003. They were instrumental for the ensuing economic upturn.

A professor of economics at Harvard University, N. Gregory Mankiw, drew similar conclusions about taxes and recessions in The New York Times in Dec. 2009, “Tax Cuts Might Accomplish What Spending Hasn’t‎.”

He mentioned a 2007 study by David H. Romer and Christina D. Romer at University of California at Berkeley. (Ms. Romer is now the Chairwoman of the Council of Economic Advisers in the Obama Administration.)

“Our estimates suggest that a tax increase of 1 percent of GDP reduces output over the next three years by nearly 3 percent,” wrote the study’s authors.

In conclusion, yes, Washington’s budget woes do warrant government reform. But Washington’s government simply demands more money. There’s increasing talk of tax hikes while countless state businesses and citizens are desperate and hurting.

The state has a spending problem, not a revenue problem.

This is a critical time – government reform is necessary.  We need to heed the Einstein quote. At stake are economic and political liberty for Washington businesses and citizens.

From the Coach’s Corner, here is more reading on how to solve Washington budget woes: “Analysis: Steps for Economic Success in Washington State.”

Here are more resource links:

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Seattle business consultant Terry Corbell provides high-performance management services and strategies.