$1 billion tax windfall would wipe out projected deficit

OLYMPIA — The state's hot economy is expected to bring in almost $1 billion more in tax revenue than projected over the next three years, apparently wiping out a large budget deficit that lawmakers worried they'd face next year.

ChangMook Sohn, the state's chief revenue forecaster, said all sectors of the economy are performing well, but "we clearly underestimated the strength of the construction sector."

He warned the good news likely won't continue.

Projections earlier this year indicated the state Legislature would have a $718 million shortfall to deal with when it puts together the next two-year budget. But the new forecast released Thursday estimates the state will take in an additional $959 million between now and June 30, 2009, which could leave lawmakers with a surplus instead of a hole to fill.

Democrats were ecstatic. "It means we're on the right course and should just stay the course," said Senate Majority Leader Lisa Brown.

Democrats control the state House, Senate and the governor's office.

The surge in tax revenue will likely bring additional demands on Democrats to increase spending, said Richard Davis, president of the business-backed Washington Research Council, which monitors public-policy issues, including state budgets.

"Certainly their constituents are going to say this is not a time to sacrifice," Davis said, noting there will be pressure to increase spending on health care, education and state-employee benefits and salaries.

All are areas with strong Democratic constituencies. "So I think that's going to make it a little bit tougher for them," he said.

On the flip side, the additional money may reduce pressure to increase taxes.

Sen. Joe Zarelli, the ranking Republican on the Senate Ways and Means Committee, predicted Democrats will be tempted to "spend us to zero."

"Let's do something else other than just spend based on what our projected revenues are. Let's prepare for the inevitable. And that is, every 10 years or so the economy goes down," said Zarelli, R-Ridgefield.

Zarelli said he plans to push for creating a rainy-day reserve account to deal with unexpected future costs.

The state works on a two-year budget cycle. Last year the Legislature passed a $26 billion operating budget for 2005-07, but increased spending by several hundred million dollars earlier this year.

Sohn projects the state will take in nearly $27 billion in tax revenue for the current biennium, which ends June 30 of next year. That's $524 million more than had been expected just four months ago. The majority of the extra money is coming from the construction sector.

In addition, Sohn projects the state will collect $29.5 billion in the 2007-09 biennium that starts next summer. That's nearly $436 million more than earlier forecast.

Sohn advised people not to bank on the trend continuing. "Even though we have underestimated the strength of housing, I think the peak is near or has just passed," he said.

"At this moment, yes, it is great. Enjoy the good economy and the good revenue. But the message is: It will not continue. It's clearly not sustainable."

Andrew Garber: 360-943-9882 or agarber@seatteltimes.com