$1 billion in new taxes will cost Washington state residents jobs

WITH Washington state lawmakers poised to adopt nearly $1 billion in new taxes on families and businesses, it's important to set the record straight.

These tax hikes will cost Washingtonians jobs and depress the economy. The damage will be greater than it would have been had lawmakers shown more restraint and cut spending deeper.

Although most taxpayers understand that, a recent commentary by Marieka Klawitter and Janine Vaughn argued the counterintuitive and incorrect position that raising taxes would do less harm to the state's economy than cutting spending would ["Balancing state budget solely with program cuts will undermine recovery," Opinion, Feb. 24].

A Washington Research Council analysis, however, shows this not to be the case. Using a well-established economic model of the state economy, we simulated several different $1 billion tax-increase scenarios. The simulations show increased taxes would result in the loss of 11,200 to 12,250 jobs in 2011. In contrast, a simulated spending cut of the same magnitude would cost only 8,600 jobs. If lawmakers handle the budget with spending restraint rather than raising taxes, 2,600 to 3,650 more Washingtonians keep their jobs.

Moreover, inflation-adjusted personal income is $600 to $900 million higher in 2011 when spending is cut than it is when taxes are raised.

Since January 2008, the state has lost more than 180,000 (1 in 13) private-sector jobs. Recovering those jobs must be the state's highest priority.

It's important to understand the differences between national fiscal policy and the tools available to state governments. While the effects of the federal stimulus remain controversial, the federal government has the ability to pump billions of borrowed money into state and local economies. Effectively applied, that money can spur economic activity that would not otherwise have occurred, boosting demand and job creation.

States like Washington simply do not have the power to stimulate their local economies by increasing government spending. First, unlike the federal government, state governments must balance their budgets. (This need to balance the budget is the source of the Legislature's current difficulties.) Second, the state is an "open" economy. When our state government increases spending, some of the economic activity leaks away to other states. At the same time, the higher taxes to fund the spending drive economic activity away.

Some of the confusion in Olympia on this point stems from a misreading of a widely publicized estimate made by Mark Zandi of Moody's Analytics. Zandi has written that an additional dollar of state government spending increases gross domestic product (GDP) by $1.41. This estimate appears in an article he wrote last October laying out a fiscal-policy road map for the federal government in 2010. The $1.41 GDP increase is for the nation as a whole and assumes that the state spending is funded by the federal borrowing. As such, the number has no relevance to a state decision to increase spending by raising its own taxes.

Although the discussion may well be moot this year, we'll surely have the opportunity to revisit the fiscal shortfall again in 2011. And, certainly, policymakers are free to determine that maintaining education, social, and health services justify higher taxes. However, it is not credible to argue that their decision has the happy effect of boosting the economy. Jobs will be lost and the recovery delayed.

Whatever mix of spending cuts and tax hikes legislators finally choose, it looks like next year will be déjà vu all over again. Current projections by the Office of Financial Management indicate that legislators will face another multibillion-dollar gap when they sit down to write a budget for the 2011 — 13 biennium.

The current session goes down as a missed opportunity to begin the kind of rethinking of what government does and how it does it that is ultimately necessary for the state to reach a sustainable fiscal path.