State budget crisis will require sacrifice - General tax increases probably out; 'sin taxes' could rise

Alina Bennette of Spokane shops for alcohol Friday at a state liquor store in Olympia. The state's role in liquor sales is one of many topics to be discussed in response to a $2 billion gap in the state's 2003-05 budget.

Mike Salsbury/The Olympian

Budget crises such as the one Washington state government faces are slamming states across the country, forcing leaders to propose spending plans they ordinarily might have spurned.
For example:

- In California, which has already resorted to selling tobacco-settlement bonds and other one-time measures, legislators are looking at pay freezes for state workers, possible layoffs, deep cuts in programs and repeal of tax incentives for businesses. "Sin taxes" on liquor, cigarettes and gambling are expected next as that state tries to deal with a budget gap of $15 billion.

- In New York, Gov. George Pataki wants to trade his state's future tobacco settlement payments for cash up front to help fill an emerging $2 billion budget hole -- a gap on par with Washington state's.

Washington Gov. Gary Locke, who faces much the same quandary, may have fewer options. That's because more than a quarter of the state's tobacco-settlement dollars already were bonded this year to raise $450 million in quick cash. State-employee pay freezes are in effect, and an increased tax on tobacco products was enacted by a 2001 voter initiative.

Locke, a Democrat who will face a divided Legislature in January, is expected to lay down his proposal Tuesday at 10 a.m. in Senate Hearing Room 4 for bridging the $2 billion gap in the two-year budget cycle that begins in July 2003.

What Locke will include in his package is still a secret; his budget spokesman, Ed Penhale, has refused to discuss details of the plan. But it's no secret that Locke doesn't want to raise general taxes during an economic downturn and he does intend to reduce the role of government.

"There will be deep and painful cuts," Locke warned Thursday during a press conference where he announced a $2.5 billion package of construction spending proposals that he hopes will spur the region's economy.

Where the ax will fall

Advocates for the Children's Alliance, part of a 30-member coalition of human services groups, fear the cuts will make it more difficult for children to get free or subsidized health care. They also worry that cuts will hurt prevention programs aimed at substance abuse, domestic violence, and youth violence, as well as programs that help families with child-care costs, spokeswoman Laura Strickler said.

On the other end of the spectrum, Bob Williams of the conservative Evergreen Freedom Foundation hopes Locke's new approach to budgeting this year will finally prod the state out of the liquor-selling business. That's just one of many jobs Williams thinks government should abandon.

But if other states are any indication, pressure to save programs could instead provide the incentive to raise taxes on beer, wine and liquor -- or to expand taxable gambling activities outside of Indian reservations. So-called sin taxes are considered some of the most politically achievable ways to funnel money into the state budget.

"What's unfortunate is the choices states have to make now are getting tougher and tougher," said Scott Pattison, executive director of the National Association of State Budget Officers in Washington, D.C. "We're really in the pain stage. What I mean by that is tough choices in terms of what cuts to make or what revenue to increase."

"There's plenty of company for Washington out there," said Arturo Perez, a state finance expert with the National Conference of State Legislatures in Denver.

A survey by that organization last month found that state budget shortfalls totaled $17.5 billion for the current budget year, which ends next June, a figure already considered out of date. Two-thirds of states have declining revenue, and huge deficits loom for the following budget cycle.

There's one hopeful note for Washington state in the survey. Although 38 states are concerned or pessimistic about revenue next year, Washington is one of 10 states with a "stable or optimistic outlook," Perez said.

Meanwhile, cash reserves have fallen from about 10 percent of state budgets in 2000 to about 3 percent, "and that's going down," Pattison said.

"It's clear evidence states are well into Year 2 of continuing budget difficulty. They face some difficult choices in their 2003 sessions for solving these budget gaps," Perez said.

Many state officials' hands are tied, since 20 recently raised their cigarette taxes and are unlikely to do it again, or they adopted other one-time relief measures, Perez said.

"If you drain your rainy-day fund as Connecticut did this year, you have nothing to go back to. If you're like Wisconsin and you securitize (sell bonds backed by) your next 25 years of tobacco payments ... you can't securitize another 25 years because it's not there," Perez said.

Washington's Legislature left about $300 million in total reserves earlier this year, but that was before news the state would not receive a windfall or super-reimbursement for its Medicaid costs.

Although lawmakers in March scaled back the spending increases they approved in 2001, they still agreed to spend $22.5 billion in the current two-year budget and would need to spend at least $1.1 billion more next year to keep those programs -- including class-size reductions and teacher pay increases -- going forward at equivalent levels, according to Locke's Office of Financial Management and legislative budget committees.

An additional $1 billion is needed to extend pay increases to state employees and state vendors, maintain public school and state employee medical benefits at existing levels, and increase college enrollments.

Government priorities

But Locke has promised that this year's budget won't be like past budgets.

At the center of his plan is a new way of looking at government services, dubbed "priorities of government," or POG. It's a process that has been popping up around the country under various names and guises. In a nutshell, it's a redefinition of what government's role ought to be and a new way to budget.

Republicans -- from state Rep. Barry Sehlin to Sen. Dino Rossi, the GOP's leading budget writers in the legislature -- see it as promising. And Williams, the one-time legislator whose Olympia think tank often criticizes government spending, embraces it as a breakthrough.

"They did some real soul searching," Williams said of Locke's budget director, Marty Brown, and his staff, who developed a top 10 priority list for government functions. "This gives them a chance to say, 'Should we be in this business?' "

One program that likely won't be a priority, in Williams' view, is the sale of liquor through state-owned stores. It's far from clear whether Locke, who has opposed getting the state out of the business in the past, will come out for privatization, but Williams says it's time to open that up for private competition, leaving the state with its regulatory role intact.

Williams also wants to see the state shut down the greenhouse operated on the Capitol Campus in Olympia.

Other cuts may come in the area of health care services for the poor. The state already is seeking federal approval of a request to change the terms of the state Medicaid program, half of which is paid by the state. Rep. Helen Sommers, the Democratic budget chairwoman, is pushing for a way to rein in the state's spiraling costs for prescription drugs and indigent medical care.

"Over the past decade, Washington has been a leader in providing assistance for insurance for children in our state," said Jon Gould, deputy director of the Children's Alliance, who fears as many as 150,000 children in low-income families could see their access to medical care limited. "All those years of progress are threatened."

Referring to Locke, Gould said: "He's made it clear that cuts in health-care programs will be deep and painful."

Brad Shannon, political editor for The Olympian, can be reached at 360-753-1688 or


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