The State’s Budget Crisis Will
Fall Hardest on the Poor, the
Needy and the Middle Class
Mark McDermott
October 15, 2001
Real Family Income Growth by Quintile and Top 5%,
1947 to 1979, U.S.
140%
120%
100%
116%
100%
111%
114%
99%
86%
80%
60%
40%
20%
0%
Bottom
20%
Second
20%
Middle
20%
Fourth 20 Top 20%
Top 5%
Adjusted for Inflation
Source: Mishel, Lawrence and Bernstein, Jared, “State of Working America, 1994-1995”, page 37. Analysis of
U.S. Census data.
2
Real Family Income Growth By Quintiles and Top 5%,
1979-2000, U.S
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
80%
52%
26%
7%
Up to
$24,000
13%
18%
$24,000 to $41,100 to $61,378 to
41,000
$61,378
$91,700
$91,700
and Up
$160,250
and Up
2000 Dollars
Source: U.S. Census Bureau, Historical Income Tables F1 and F3. Percentage increase is the average increase
for all families within group. URL: www.census.gov/hhes/income/histinc/f01 and f03.
3
Average Change in Real Family Income by Quintiles.
Washington State, 1988 to 2001
40%
35%
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
36.0%
28.0%
12.4%
7.0%
$17,012
$41,135
$62,995
$96,420
$178,636
-9.4%
Note: Adjusted for Inflation. Pooled average for each quintile meaning the average family income for the
poorest 20% of families was $17,012 averaged over the years 1999 to 2001. Their income dropped 9.4% over the
since the late 1980s.
Source: U.W. Northwest Policy Center, “The State of Working Washington”, September 2001, page 2. URL:
http://depts.washington.edu/npc/SWW.pdf
4
Crisis in Affordable Housing in Washington State and
King County, 2000
The U.S. Department of Housing and Urban Development (HUD) defines housing as
affordable if it cost less than 30 percent of the renter’s gross monthly income. A HUD
“Fair Market Rent” is the rent for a particular type of housing such as a two bedroom,
one bath apartment where 60 percent of renter pay more and 40 percent pay less for this
type of housing.
In 2000, the Fair Market Rent in King County for a 2 bedroom, one bath unit was $809 per
month. 44% of renters in King County could not afford this rent. A worker would have
to earn $15.56 per hour full-time all month to have this unit be “affordable”. The state
minimum wage is $6.72 per hour.
In 2000, the Fair Market Rent in Washington State for a 2 bedroom one bath apartment was
$656 per month. 35% percent of renters in Washington State could not afford this rent.
A worker would have to earn $12.62 per hour full-time all month to have this unit be
“affordable”.
Source: National Low Income Housing Coalition, “Out of Reach”, September 2000, King County Section, page 1.
URL: http://www.nlihc.org/oor2000
5
Hunger in a Land of Plenty
The U.S. Department of Agriculture conducted periodic survey of American households to
assess the level of food insecurity and hunger in the United States. Their 1996-98
survey revealed the following:
•
10 million American households (9.7 percent) were food insecure and 3.6 million
households (3.5 percent) experienced hunger at some time during the month.
•
In Washington State 12 percent of our households were food insecure, the eighth highest
rate in the country. Even Florida, Alabama and South Carolina had lower rates
•
Our state tied for the 4th highest rate of hunger in the country with 4.6 percent of our
households experiencing hunger. Every state with higher hunger rates was much poorer
than Washington State.
Source: U.S. Department of Agriculture, “Prevalence of Food Insecurity and Hunger, by State, 1996-98”. URL:
http://www.ers.usda.gov/epubs/pdf/fanrr2/index.htm
6
State Welfare Reform Leaves Most Families With
Working Parents Stuck in Poverty
• Our state’s welfare reform program, WorkFirst, was based on a belief
that requiring recipients to take the first job available would lead to
long-term wage increases and economic security. This new policy
occurred during the best economic times of the past thirty years.
• The long-term results are dismal. Three years after families left the
program due a job, 55 percent of the families’ earnings kept them
below the federal poverty line.
• These workers earned substantially less per hour than a similar group
of low-wage workers. This earnings gap widened over the three years.
• The program has performed so poorly that the Governor has lowered
its goals for earnings increases over time.
Source: Employment Security Department, “Wage Progression and WorkFirst Returns Report for Fiscal Year 2001
Through Third Quarter 2000”, June 2001; and Office of Financial Management, “WorkFirst Performance Report”,
Fiscal Years 2000 and 2001.
7
Legislature Mandates Statewide Committee to Examine
Current State Tax Structure and Recommend
Alternatives to Legislature by December 2002
The Washington State Legislature passed Engrossed Substitute Senate Bill (ESSB 6153) that
creates a Committee to examine the current tax system and development of tax
alternatives. The committee will determine how well the current tax system functions
and how it might be changed to better serve the citizens of the state in the 21st century.
The Committee will examine the elasticity, equity and adequacy of the tax system.
Elasticity means how well the system raises needed revenue during economic booms
and recessions. Equity means fairness. Adequacy means how well the system generates
the revenues needed for the state’s needs.
The Committee will develop multiple alternatives that increase harmony between tax
systems of this state and its border states; encourage commerce and business creation;
and encourage home ownership. The findings of the study and alternatives developed
by the Committee must be reported to the Legislature by November 30, 2000
Department of Revenue, “Washington State Tax Structure Study”, 2001. URL:
http://dor.wa.gov/wataxstudy/wataxstudy.htm?noframes
8
Our State and Local Tax System Fails Three Major Tests
of a Good System
• Our state has the most regressive tax system in the country. This
means the the poor pay a much higher percentage of their incomes in
state and local taxes than the well-to-do. We have the worst record in
the nation.
• Our state’s tax system which is heavily dependent on sales taxes tends
to see revenues plummet during recessions which is the time that the
demand for services increases due to rising unemployment. This flaw
creates deep budget crises during recessions.
• Our state’s tax system does not generate adequate revenue to meet the
important needs of our state for quality education, transportation,
workforce training and human services.
• What is does do is give the well-to-do the lowest state and local tax
rates in the nation.
9
Percentage of Family Income Paid in State and Local
Taxes, Washington State, 2000
$150,000
$125,000
$100,000
$75,000
$65,000
$55,000
$45,000
$35,000
$25,000
$15,000
16% 14.8%
14%
12%
10.5%
10%
8.7%
7.7% 7.1%
8%
6.7% 6.3%
5.6% 5.4% 5.3%
6%
4%
2%
0%
Source: Washington State Department of Revenue, Tax Incidence Model, August 2, 2000.
10
Comparing Our State’s Regressive Tax System with the
Progressive Tax System in Delaware, 1995
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Bottom 2nd 20% Middle 4th 20%
20%
20%
Washington
Next
15%
Next 4% Top 1%
Delaware
Note: Shares of family income for non-elderly married couples in 1995.
Source: Citizens for Tax Justice, “Who Pays?: A Distributional Analysis of the Tax Systems of All 50 States”, 1996.
URL: http://www.ctj.org/html/whopay.htm
11
Washington State’s Tax Burden on Income Groups
Compared to the Average of the 50 States, 1995
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Bottom
20%
Second
20%
Middle
20%
Fourth
20%
Washington State
Next
15%
Next 4% Top 1%
United States
Note: Washington data are shares of family incomes paid in state and local taxes for non-elderly couples. U.S.
data are taxes on own residents as shares of family income for non-elderly married couples.
Source: Source: Citizens for Tax Justice, “Who Pays?: A Distributional Analysis of the Tax Systems of All 50
States”, 1996. URL: http://www.ctj.org/html/whopay.htm
12
2003-05
2001-03
1999-01
1997-99
1995-97
1993-95
1991-93
1989-91
1987-89
1985-87
1983-85
1981-83
1979-81
0%
-2%
-4%
-6%
-8%
-10%
-12%
-14%
-16%
-18%
-20%
1977-79
Washington State’s Tax System Does Very Poorly in
Generating Revenues During Economic Slowdowns and
Recessions., 1997 to 2005
Revenue Shortfalls as a Percentage of General Fund Appropriations
Note: Numbers are estimated from published chart. 2001-03 and 2003-05 are estimated. 2003-05 assumes a
moderate recession. Estimates published on January 5, 2001.
Source: U.W. Fiscal Policy Center, “Washington’s Cycle of Boom and Bust”, Public Finance Notes, January 5,
2001. URL:http://depts.washington.edu/fpc/notes/2001/01.pdf
13
Cumulative Impact of Tax Changes Enacted Since 1994,
Washington State
$0
-$200
-$400
-$600
1995
($51)
1996
1997
1998
1999
2000
2001
2002
2003
($237)
($391) ($429)
($621)
-$800
-$1,000
-$1,200
-$1,400
($856)
($1,123)
($1,173)
($1,233)
Source: U.W. Fiscal Policy Center, “Despite Budget Crisis, Legislators Propose $977.9 Million in Tax Cuts”, Public
Finance Notes, February 27, 2001. URL: http://depts.washington.edu/fpc/notes/2001/03.pdf
14
Initiative 722 Valuation Cap Shifts Tax Burden from Rich
to Poor, 2000 (Implied Tax Liability Change by Assessed
Valuation, Calendar Year 2001 Simulation)
$200
$121.25
$100
$11.57
$0.04
$80 to $150K
$150K to $300K
$0
Less than $80K
($100)
More than
$300K
($200)
($300)
($400)
($370.29)
Source: U.W. Fiscal Policy Center, Public Finance Notes “Initiative 722 Valuation Cap Shifts Tax Burden from Rich
to Poor”, December 1, 2000. URL: http://depts.washington.edu/fpc/notes/2000/03.pdf
15
State Blue Ribbon Commission on Transportation
Proposes Higher Rates of Taxation on the Middle Class
and the Poor than the Well-to-to, December 2000
1.20%
1.00%
1.00%
0.80%
0.60%
0.60%
0.50%
0.40%
0.30%
0.18%
0.20%
0.00%
Less than
$25K
$25K to
$50K
$50 to
$100K
$100 to
$200K
More than
$200K
Proposed Taxes as a Proportion of Household Income
Note: Percentages estimated from chart. Awaiting actual data.
Source: U.W. Fiscal Policy Center, “Working Poor Shoulder Cost of Transportation Tax Proposal”, Public
Finance Notes, December 19, 2000. URL:http://depts.washington.edu/fpc/notes/2000/04.pdf
16
Budget Crisis Comes to Washington State, Fall 2001
• Prior to the September 11th tragedy, the State’s Forecast Council
created its September 2001 Economic and Revenue forecast for the
state. It forecasted that revenues for the current state biennium
(July 2001 to June 2003) would decline for the first time in 20
years.
• We know that the impacts of September 11th will make this forecast
even worse thereby helping to deepen the worst state budget crisis in
20 years.
• Seattle P-I - October 3, 2001. “The Locke administration is girding for
budget cuts of as much as $1 billion , including probable state
government layoffs.”
• Who will bear the brunt of the budget crisis?
Source: Office of the Forecast Council, “Washington Economic and Revenue Forecast”, September 2001, page 42.
http://www.wa.gov/ofc/pubs/sep01pub.pdf
Seattle P-I, “Locke Girds for Budget Cuts”, October 3, 2001, page 3.
17
Governor Locke says he wants to shield public schools
and colleges from the budget cuts of up to $1 billion,
October 3, 2001. What’s left?
$7
$6
$5
$4
$3
$2
$1
$0
$6.20
$2.50
$1
$0.35
DSHS
Corrections
Natural
Resources
All other
Remainder of State General Fund excluding public schools and colleges (in
$billions)
Washington State Senate Ways and Means Committee, “2001-03 Operating And Capital Budget Highlights and
State Summary Totals”, June 20, 2001. URL: http://leap.leg.wa.gov/library/SWMBudDoc/SummaryAsPassed.pdf
18
The Budget Crisis Will Fall Hardest on the Poor, the
Needy and Low and Moderate Income Working Families
• “None of the scenarios we are looking at right now calls for a tax
increase. The state will manage its way out of the budget crisis.”
Governor Locke, October 3, 2001, Seattle P-I.
• Lets be direct. The budget will balanced on the backs of the poor,
the needy and low and moderate income working families. Why?
The Department of Social and Health Services makes up 60
percent of the remainder of the state budget after the public
schools and the colleges are exempted.
• The Department of Corrections makes up about 10 percent of the
remainder. Will they be cut?
• The remainder of the entire state government makes up the final 30%.
To save a billion dollars, one-third of state government would be
eliminated to make up the billion dollar shortfall.
19
Economic and Social Justice in our State’s Budget Crisis
• The low and moderate income families in our state pay substantially
higher rates of state and local taxation than the upper middle class and
the wealthy.
• The poorest 20 percent saw their incomes drop in the last 10 years.
The next 40 percent saw their incomes grow slowly.
• These groups will lose key services and benefits with budget cuts.
• Why don’t we see proposals to raise taxes on the sectors in our state
have seen their incomes rise very rapidly in the past 10-20 years?
• Taxes should be raised on those who are best able to pay and currently
pay a much lower rate of taxes than the middle class and poor.
• To do otherwise is to further harm those least able to meet basic human
needs.
20