State Senate budget raises eyebrows but not taxes

Staff writerApril 20, 2013 

  • UNSPECIFIED CUTS & REVENUES IN THE SENATE BUDGET

    • $40 million in increased collection of sales or use tax from online sellers. The Senate says it believes it can use unspecified data to determine who is making online purchases and collect money that is already owed.
    • $86 million in administrative and efficiency savings, spread across agencies based on their size and other factors such as effects on public safety. The Senate directs agencies to use lean management and input from employees to become more efficient.
    • $50 million in savings from providing more efficient back-office services to state agencies and recouping money for those services that went unused. The Senate and the Governor’s Office disagree on how much unused money is available. This cut is on top of at least $20 million already assumed to result from a consolidation of back-office services into the Department of Enterprise Services.
    • $11 million tied to vacancies and other unspent money in natural-resource agencies, much of which is disputed.
    • $120 million projected to go unspent by agencies.

    Note: The Senate also assumes $15 million in savings from more efficient use of information technology, which could be tied to policies under consideration.

State lawmakers are going down to the wire to negotiate a budget deal, but they haven’t even agreed on whether the numbers they’re using are real or imaginary.

Some 12 percent of the Senate’s proposed budget solution, at least $300 million, is achieved through a series of guesses about how much money can be saved and how much in extra taxes can be collected without specific directives or changes in the law.

The GOP-led budget bridges the state’s fiscal shortfall and plows an extra $1 billion into basic education without raising taxes — at least on paper. Democrats argue the Senate is playing with funny money.

“It’s one thing to identify it,” said House Finance Committee Chairman Reuven Carlyle, a Seattle Democrat. “It’s another thing to book it, go to the bank, cash the check and go down to your local mom-and-pop and start spending the money.”

The lead author of the plan, Andy Hill, the Senate budget chairman and a Redmond Republican, said he is confident the assumptions will pan out. A $33 billion budget, he said, outlines categories of spending but can’t be expected to specify every dollar spent.

Hill said it’s the House budget that is questionable with its reliance on hundreds of millions of dollars in new tax revenue that has not yet passed the House and $240 million from the state’s rainy-day fund that requires supermajority votes to tap.

“Ross Hunter admitted he doesn’t have the votes to do it. So that seems completely imaginary, of their own admission,” Hill said.

Hunter, the House budget chairman and another Democratic critic of the Senate budget math, has said the rainy-day fund issue would be resolved in final negotiations.

Negotiators have just a week left to strike a deal before the end of their 105-day session. The Republican-flavored Senate budget is far apart from the one in the House, which would pay for education with fewer cuts to social services and with some $1.3 billion in new revenue from expiring taxes that would be renewed and tax breaks that would be eliminated, many of which went before their first public hearing Friday.

Some of the Senate’s assumptions are ambitious versions of a common tactic in state budgeting, one that even the House budget does in smaller form. That is to assume state agencies can afford to take a bit off the top.

But in a more creative move, the Senate is also betting the state can collect $40 million in extra sales tax from online transactions over the next two years without raising taxes or hiring new tax collectors — targeting taxes that are already due but not collected.

ONLINE SALES

Shoppers are supposed to send government a cut of their online purchases, but hardly anyone does. Federal courts have ruled that states can’t make online retailers collect the tax unless those sellers have a physical presence in the state, and there’s a debate over what presence means.

A proposal circulating in Washington, D.C., would allow states that simplify their tax code to collect taxes on out-of-state companies based on sales volume rather than physical presence. Such a change by Congress would raise more than $500 million for Washington’s next two-year budget and more than $900 million for future budgets, according to estimates last year — but the measure’s fate is uncertain.

“To actually put a number in this biennium is an impressive yoga move,” Carlyle said.

Budgeters reached the number by figuring they could get a small share of the estimated missed revenue. But they acknowledge they are still trying to figure out exactly how to do it. The Department of Revenue said it has presented some options but doesn’t know exactly what the Senate is proposing.

Senators have their staff looking at how the state could get data from retailers, credit card companies or other businesses to identify who owes taxes.

“We believe that with new technology and new availability of certain data, that we can pinpoint these and collect those dollars. Apparently they’ve been successful doing something similar in other states as well, at least in one other state,” Hill said.

Senate staffers have revenue officials looking at the example of other states, particularly Pennsylvania.

But a spokeswoman for the Pennsylvania revenue department said she doesn’t know of the state using data in such a way.

The Keystone State did boost its tax collections without changing the law. But it did so in part through some avenues that aren’t available to Washington.

Pennsylvania used two main tactics, said the spokeswoman, Elizabeth Brassell. The agency raised an extra $4 million last year that it credits to a new line on its state income tax form explaining what taxpayers owe on online purchases. That’s not likely to work in income tax-free Washington.

Brassell said the second, more lucrative avenue, raising $31 million mostly since Sept. 1, was a new set of guidelines for online retailers about what physical presence means. She said 101 previously untaxed e-commerce retailers are now collecting.

For example, a company is deemed to have a presence there if its sales force regularly travels to Pennsylvania, or if it pays Pennsylvania residents to have links on their websites where people can click through to place orders with the company.

Amazon is now considered to have a presence in Pennsylvania, reportedly because of the changes the state made. But the Seattle-based retailer already has an indisputable presence in Washington and collects sales taxes from customers here.

Companies that fall under such rules can just change their advertising behavior, said Steve DelBianco, who represents some of them as executive director of NetChoice, a trade association of e-commerce companies that includes big names such as eBay, Facebook and Overstock.com. He warned that Washington should avoid the “pitfalls” of following Pennsylvania’s lead.

Whatever the technique used, estimating its effect is nothing new, Hill said. He compared the Senate’s approach to past budgets that spent more money on tax auditors to boost revenue collections. The revenue department says it’s exceeding revenue targets and the addition of staff is likely part of the reason why.

But this directive isn’t intended to require more staff.

“I haven’t been fully briefed about how exactly they’re going to go about it, but there was a feeling that there is very real money out there and it can all be done within current statute,” Hill said.

EFFICIENCIES

A larger share of the unspecified budget changes, roughly $150 million, comes in the form of savings from efficiencies.

On the campaign trail last year, Jay Inslee said he could solve the state’s budget woes in large part by making government more efficient. He also mentioned other tactics including ending tax breaks.

Lean-management techniques pioneered by Toyota, he said, would have a quick payoff. Lean techniques focus on cutting out waste in business practices.

But Inslee struck a new tone once taking office as governor to insist that extending tax rates and closing tax exemptions be the main budget solution. His budget director said when Inslee unveiled his plan that it was too soon to count on savings from the efficiencies the Democratic governor is putting in place.

Inslee decried “phantom cuts” in a news release responding to the Senate budget — although he then worked with House Democrats to include $20 million in their budget as lean-management savings. Inslee’s budget office said it sees that as a more reasonable estimate.

Rep. Laurie Jinkins, D-Tacoma, one of the most vocal critics of what she calls “imaginary numbers” in the Senate budget, said the House consulted with the governor, “as opposed to just making up numbers to make our budget balance.”

But the Senate says its proposed savings aren’t just built on a wing and prayer. Hill said budget writers and staff have scoured the books of some agencies and found areas that seem to yield even more cuts than he built into the budget.

For example, he said, the Department of Ecology had some unfilled vacancies on its books. The budget reduced Ecology’s budget by $9.9 million to account for unspent money, on top of its $2.4 million share of efficiency-related cuts.

Ecology said the cut would hit the general fund but its unspent money came mostly from special pollution-cleanup funds that can’t be tapped to offset the cut.

Ordering agencies to find unspecified efficiencies isn’t something new dreamed up by Republicans when they took over the Senate this year with help from two Democrats.

“This would be our 11th administrative efficiency cut since the start of the recession in ’07-09,” said Ecology chief financial officer Erik Fairchild.

But the cuts pile up, and Fairchild said the department would respond by scaling back programs and eliminating some altogether. For example, he said, the agency would make up to 126 fewer decisions on water rights and would eliminate an enforcement program that responds to complaints about illegal use of water.

His agency has worked with private-sector experts to implement lean management, but he said those experts advised not to think of lean as a budget-cutting tool but as a way to improve processes to make them as efficient as possible.

On top of the efficiencies, the Senate budget also assumes agencies will leave about $120 million unspent. That’s less than the average over the past few years but higher than the typical amounts in the years before the recession hit.

Jordan Schrader: 360-786-1826
jordan.schrader@thenewstribune.com
blog.thenewstribune.com/politics
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