State revenue forecast shrinks

OLYMPIA -- Sharp declines in predicted revenue from the real estate excise tax and a mild national recession have led the state's top economist to downgrade his revenue forecast by $423 million.

But Washington's economy will not fall into recession because of strong growth in aerospace, high tech and international trade, said ChangMook Sohn, executive director of the state's Economic and Revenue Forecast Council.

"The outlook for the state economy is significantly brighter than for the U.S. but we will be affected by the national slowdown as well as our own housing market problems," Sohn said Friday.

Even with the new update, state lawmakers still have more than $200 million of additional revenue compared with the forecast in place when they adjourned from the 2007 session.

Though the forecast is nonpartisan, interpretations of what it means have become a cornerstone of this year's election year rhetoric.

Democrats see a strong economy and a forecast that won't much affect the spending plan that they unilaterally passed last year. Republicans see it as a sign that their warnings that the economy cannot support double-digit spending have come true.

Though lawmakers had been predicting a decline in projected revenue for some time, the news came as a blow to Democrats who had hoped to pass a supplemental budget that would leave more than $1 billion unspent.

Most now concede that that level of savings is no longer realistic.

Gov. Chris Gregoire's previous budget had left $774 million unspent, as well as $430 million for the protected budget stabilization or "rainy day" account.

Though she could leave her spending priorities untouched and still maintain more than $300 million in unrestricted savings, Gregoire said she wouldn't.

"I'm not interested in just taking that and going home. No, I want a reserve," she said.

She did not say how much more she intended to save or how much of the existing budget she would cut; instead she said she wanted to see the Legislature's spending plans.

The House is scheduled to release its spending plan next week.

Gregoire said she did not regret setting the bar for savings high in her budget because it tempered lawmakers' expectations in terms of new spending proposals.

Sohn says the state budget is being hurt by the national economic downturn tied to deteriorating real estate and financial markets, weak employment and declining consumer confidence.

Sohn had long predicted the declining revenue from housing, but he changed his forecast because the decline was more severe and came quicker than he had expected.

Of the $423 million downgrade, Sohn attributed $231.9 million to the weakened housing market and a drop-off in real estate excise tax collections.

Democrats were quick to put the adjustment in context -- a 1.4 percent change to $30 billion of predicted revenue.

"What I hear is that the long-term economic growth prospects remain strong," said Rep. Jim McIntire, D-Seattle. "There is no recession forecast for Washington state but slower growth is here."

Sen. Joseph Zarelli, a Republican leader on the Senate Ways and Means Committee and a member of the Economic Revenue and Forecast Council, said the state economy is still in good shape -- it's Democrats' spending that is out of whack.

"The forecast is unhappy news only for those who chose to ignore the warning signs in hopes that the unexpected economic boom of the past few years would continue to bail out the spending decisions being made here in Olympia," he said.

Gregoire's GOP opponent this November, Dino Rossi, said she had increased spending by 33 percent since taking office in 2005. "Her overspending has led to a huge deficit that is growing bigger all the time," Rossi said.

But while legislative leaders on both sides of the aisle vow to reduce spending, some social service advocates said that economic hard times are a reason to spend, not cut.

A coalition that includes the Service Employees International Union's health care workers and the Washington Association of Churches urged action that would help those people who would be hit the hardest during a recession.

The Washington State Budget and Policy Center, a liberal think tank, said: "Making the right investments now can minimize the effects of the economic downturn on families, communities and the regional economy. Rather than knee-jerk reactions such as budget cuts, there are better choices that are known to foster economic security."

The group recommended using the newly established rainy-day fund to stave off cuts in services -- an idea that has no support from legislative leaders or the governor.

WASHINGTON TAX REVENUE AT A GLANCE

BOTTOM LINE: Washington state tax revenue is projected to drop by $423.4 million between now and June 30, 2009, compared with the November forecast.

INCOME: Income for the current two-year budget cycle is projected at nearly

$29.46 billion. The two previous bienniums had income of $23.4 billion and $22.1 billion. The state has a $33 billion budget.

RESERVES: $953.7 million, of which $429 million is in a hard-to-tap "rainy day" fund.

NEXT: Lawmakers have to decide on revisions in the current two-year budget -- how much to add in new spending, how much to trim from the old budget and how much to leave in reserves.

MORE INFORMATION: Forecast Council's Web site is erfc.wa.gov.

-- The Associated Press