Tax break court case ups Wash. deficit to $2.8B

A court case that extended a tax break to out-of-state companies has nudged Washington's budget deficit to about $2.8 billion, but early signs of an economic recovery are making the state's financial future a bit brighter.

The new deficit figure stems from Friday's report of the state Economic and Revenue Forecast Council, which formulates the official estimate of future state tax collections. The report showed a state economy that appears to be stabilizing, with growth in state revenues returning over the next few years.

The Legislature's Democratic majority must find a way to bridge the $2.8 billion deficit. Democrats said they plan a combination of spending cuts, tax increases and one-time fixes, such as fund transfers. With the council's latest quarterly report in hand, budget writers will work fast.

Gov. Chris Gregoire, also a Democrat, is expected to open the public debate on detailed tax proposals next week, with legislators following soon after.

Friday's economic report said the state will collect more tax revenue than previously expected for the rest of its current two-year budget cycle, which runs through June 2011.

Although the predicted revenue growth was relatively modest, the mere fact that money is flowing in faster than anticipated was a striking change from the past two years, when the worst recession in decades repeatedly drove tax collections downward.

The national economic recovery, however, is still fragile, said Arun Raha, the state's chief economist.

"The Great Recession may be over, but it has wrought havoc on the economy, which will take time to heal," he said.

Financial services companies are still vulnerable, particularly regional banks with large commercial real-estate portfolios, Raha said. The lagging construction sector also will drag on the recovery, and consumer spending - critical in sales-dependent states like Washington - appears to have reset at a lower level, he said.

Washington's 9.5 percent unemployment rate, the highest in 25 years, is expected to peak at 9.8 percent in the second quarter, Raha said. Consumer confidence is closely tied to the jobs picture, he noted.

The deficit was driven larger by the net loss of about $118 million from the state's loss in a recent court case, which extended a sales-tax break to companies based outside Washington.

That was no surprise to lawmakers, who already have drafted bills that would undo the state Supreme Court's decision and restore the bulk of that lost tax income.

"None of us have to go scramble," said House Finance Committee Chairman Ross Hunter, D-Medina.

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