Yesterday the Economic and Revenue Forecast Council (ERFC) adopted an official budget outlook based on Gov. Inslee’s operating budget proposal. It estimates that the budget would leave an unrestricted ending balance in funds subject to the outlook (NGFO) of $275 million over four years. But there is uncertainty about the economy and the constitutionality of the capital gains tax, which is assumed in the budget.

A Superior Court judge found the capital gains tax unconstitutional last March. Nevertheless, the Legislature subsequently passed a historically large 2022 supplemental budget. It increased 2021–23 appropriations by 8.6%; compared to 2019–21, 2021–23 appropriations increased by 24.3%. The April 2022 outlook included the revenues from the capital gains tax. Although capital gains revenues are estimated to be a small portion of overall NGFO revenues, the spending increase was so large that the budget did not balance without the capital gains revenues. That said, the shortfall would have been covered by reserves in the budget stabilization account (BSA, or the rainy day fund) and the Washington rescue plan transition account (WRPTA).

However, the revenue forecast has increased since April. Thus, the maintenance level (the cost of continuing current services, adjusted for enrollment and inflation) of the 2022 supplemental could now easily be funded even if the capital gains tax is determined to be unconstitutional. (The state Supreme Court heard arguments in the case this morning.)

But the governor proposes $4.873 billion in new policy spending for 2023–25, on top of maintenance level increases. His proposal would increase NGFO appropriations by 9.8% over the enacted 2022 supplemental. The official outlook that was adopted yesterday estimates that his proposal would leave unrestricted NGFO ending balances of $1.282 billion in 2023–25 and $275 million in 2025–27.

The outlook continues to include estimated capital gains revenues. At the ERFC meeting, Rep. Orcutt requested an alternative outlook excluding capital gains revenues. The alternative has not yet been posted, but I estimate that the governor’s budget would not balance over four years without those revenues. (See the table below.) Although the governor’s budget would drain the WRPTA, the balance of the BSA would be sufficient to sustain spending if the capital gains tax is unconstitutional.

The outlook estimates that total state reserves (including the unrestricted NGFO ending balance, the BSA, and the WRPTA) would drop to $2.411 billion in 2025–27. That is just 6.6% of revenues and other resources in fiscal year 2027. The state treasurer recommends that total reserves should be at least 10% of NGFO revenues. In a policy brief this month, we argued that the state should not spend the WRPTA down at this point, given the economic uncertainty.

Indeed, what might happen in the event of a recession? Using the ERFC’s pessimistic alternative forecast from November (which was assigned a 35% probability), I estimate that the governor’s budget proposal would not balance in 2023–25 or 2025–27. Reserves under his proposal would not be large enough to cover the shortfall.