Washington Policy Blog

Tracking federal "recovery" spending

April 17, 2009 in Blog

The astronomical $787 billion federal “recovery” package was back in the news this week as thousands of Washingtonians took to the streets across the state to protest among other things taxes, spending, and the federal bailout packages. According to the Washington State Patrol, the tax and spending protest was 5,000 strong in just Olympia – the largest rally by far of the year.

Celebrating Earth Day...The Right Way

April 17, 2009 in Blog

Next Wednesday, April 22, is Earth Day and we are celebrating in proper style. Join us at Rachel Carson Elementary School in Sammamish at 6:30 to see "Not Evil Just Wrong: The True Cost of Global Warming Hysteria," an excellent film about the costs of thoughtless environmentalism.

The film is the second documentary by journalists Phelim McAleer and Ann McElhinney. Two years ago they joined us as keynote speakers for our environmental luncheon when they showed clips from their first film, "Mine Your Own Business."

The film highlights the high cost of the ban on DDT and the millions in Africa and Asia who have died from malaria as a result. Two years ago, the World Health Organization, saying they could no longer ignore the science, approved the use of DDT as a tool against malarial mosquitoes. The film combines interviews with scientists, environmental activists and average citizens to raise concerns about the current wave of regulations and taxes being proposed to fight global warming.

You can see clips of the film at the Not Evil Just Wrong Youtube site or watch the preview below.

The private screening is the first in the Seattle area and is free. Please RSVP by calling (206) 963-3409 or lleveque [at] washingtonpolicy [dot] org">lleveque [at] washingtonpolicy [dot] org.

Maybe legislators should take their policy cues from national magazines after all...

April 17, 2009 in Blog

Seattle_Metros_logo Since it is all the rage these days to through out rankings based on what national magazines say (especially Forbes) about ourbusiness climate as justification for policies that usually make running a business in this state more expensive, I say, we might as well expand this trend to other areas.

In what is incorrectly going to headline today's "In Some Lighter News" category (this is serious stuff people) Forbes re!
leased another set of rankings this week, "America's Most Miserable Sports Cities, 2009." 

The winner? Seattle.

Forbes says that the loss of the Sonics put Seattle over the edge to gain this year's award. But not to worry, the Seahawk's 2006 Super Bowl tragedy, the Mariners lack of a World Series appearance, and only one national championship to speak of (1979 - Sonics) also contributed. We even beat out Cleveland, which is saying something.

But once again, I must point out the shortcomings of the Forbes ranking. Seattle actually has another national championship to its name -- that of the 1917 Seattle Metropolitans' Stanley Cup victory. It was the first time an American team had won the St!
anley Cup. Of course, seven years later the team folded. Come !
to think of it, the Seattle Pilots baseball team also left town in 1970. Perhaps there's a pattern here.

It seems that Forbes got this ranking correct. (sigh)

Senate Ways & Means budget amendments

April 16, 2009 in Blog

Last night the Senate Ways & Means committee adopted numerous amendments to the proposed Senate budget. Since the amendments are not available online, here is a brief summary of some of those adopted:

  • Requiring a study by the Joint Legislative Audit and Review Committee (JLARC) of the state’s recreational boating programs. (This in contrast to our suggestion yesterday for JLARC to review how well the state is following the current performance-based budgeting requirements already in law.)
  • Suspending the Select Committee on Pension Policy (SCPP) during the 2009-11 biennium. (SCPP studies issues and policies affecting the state's public employee retirement systems and makes recommendations to the Legislature regarding changes. The base Senate budget proposal defers over $400 million in pension contributions.)
  • Directing the State Board of Education to develop a comprehensive accountability index and a “process for addressing performance challenges that will include the following features:
(A) An academic performance audit using peer review teams of educators that considers school and community factors in addition to other factors in developing recommend specific corrective actions that should be undertaken to improve student learning;

(B) a requirement for the local school board plan to develop and be responsible for implementation of corrective action plan taking into account the audit findings, which plan must be approved by the state board of education at which time the plan becomes binding upon the school district to implement; and

(C) monitoring of local district progress by the OSPI. The proposal shall take effect only if formally authorized by the legislature through the omnibus appropriation act or other enacted legislation. 

In coordination with the OSPI, the state board of education shall seek approval from the United States Department of education for use of the accountabilit!
y index and the state system of support, assistance, and intervention, to replace the federal accountability system under . . . the no child left behind act of 2001.”

  • Authorizing a 14 percent per year tuition increase for four-year colleges and universities to increase “budgeted enrollment levels by 3,475 full-time equivalent students each year to account for the additional $83 million of tuition revenue resulting from the higher annual increases.” (The House Ways and Means last week adopted an amendment to remove the budgeted enrollment levels from its budget proposal.)

As for those amendments that failed, The Olympian has this story about "Senate Republicans unsuccessfully propos[ing] a 2 percent cut to the amount of money used to cover health insurance costs for state employees."

Business tax rankings: WA does really well in areas it doesn't tax (yet)

April 16, 2009 in Blog

As some policymakers continue to push for "revenue enhancements" to shore up the state's $9 billion budget deficit, some are oft to quote studies showing Washington's pro-business climate in order to justify said "revenue enhancements (tax increases)". 

Get ready for another round of citations because this week the Small Business & Entrepreneurship Council released its "Business Tax Index 2009: Best to Worst State Tax Systems for Entrepreneurship and Small Business."

Their study ranks Washingt!
on as the 4th best place for small businesses viz a viz tax systems. This is a one place improvement over 2008. 

While I do think the world of the SBE Council, for years we have had issues with the way they weight their index. I've blogged on their methodology before but here's a quick summary:

Washington ranks very well in the rankings where there essentially is no data. We rank 1st in personal and corporate income taxes becau!
se we do not have them
. We rank 1st in capital gains tax rates because we do not have them. We are in the middle of the pack for property tax rates. We are second-to-last in state, local sales, gross receipts, and excise taxes. We are 44th in adjusted unemployment taxes. Second-to-last in gas taxes. 

Basically, we are overweighted towards a high ranking because Washington is unable to be ranked in so many of the criteria. And when we can contribute data to the study, we rank pretty low.

So as poli!
cymakers pitch a sales tax increase and while pointing to this study as reason why businesses should be able to "handle it", they are forgetting that we are already ranked second-to-last in the sales and gross receipts tax column. Maybe they are trying to shoot the moon. I think this is one reason why the business community, and a lot of other folks, are nervous about letting the state establish new avenue of taxation. Washington ranks very well in the SBE Council study in the areas where we don't tax, but pretty awful in the areas we do tax.
Perhaps its just a matter of trust

But this same group apparently doesn't think so great of us when it comes to health care for small businesses. It ranked Washington second-to-last on its "Health Care Policy Cost Index." 

Federal effective tax rates average 20% for small businesses

April 15, 2009 in Blog

A new report out from the Small Business Administration reveals the effective tax rates for small businesses when it comes to federal income taxes. Average rates range from 13.3% for small sole proprietorships to 27% for small S corporations. And remember, the effective tax rate is the actual amount of taxes paid by a firm as a percent of its net income. This is important because these rates reflect the statutory benefits aimed at lowering a business' tax liability. In essence, the 13-27% is lower than what the rate would otherwise be without legislative deductions, exemptions, credits, et al.

And keep in mind that the SBA defines a small business as a firm with less than 500 employees. In my mind, a firm with 499 employees is a pretty large enterprise. I do appreciate that the state government defines a small business as one with 20 or fewer wo!
rkers and earn less than $3 million or less in annual gross income. 

As the economic downturn interminably lags on, the importance of supporting small businesses is more important than ever. Looking at data from the last recession in the early 2000s (granted a different type of slowdown, but a strong one nonetheless), sole proprietorships and LLCs see strong growth during the downturn. Even going back to the early 1990s recession -- and before LLCs were available in Washington -- sole proprietorships skyrocketed while corporation registrations floundered. This also happened during the recession of the early 80s.

When unemployment takes off during a recession, budding entrepreneurs who have been laid off are almost forced to finally start that small business they have been thinking about for so long. In fact, according to the t="_blank">census bureau, during the 2001-2002 period, firms with between 1-4 employees saw a 14% increase in employment while firms with 5 or more employees saw an average employment percentage decrease of 5.3%. As the economy turned around over the next few years, and the unemployment rate improved, some of those small business owners went back into the fold of a large employer and steady paycheck.

Policymakers on both the state and federal side should recognize that right now there are a lot of laid off workers who are also budding entrepreneurs looking for their next opportunity. Washington's unemployment rate for March is now a startling 9.2% and is forecasted to get worse over the next year. The Small Business Survival a> report linked to earlier also mentions that, even with Washington's supposedly friendly small business climate, "Washington businesses pay a higher initial share of taxes than individuals compared to other states."

So, as policymakers in Olympia debate what (not if) kind of tax increases should be leveled on businesses, they should remember that any kind of tax increase will come on top of the 13-27% federal income tax.

Moving towards a performance-based government

April 15, 2009 in Blog

As lawmakers put the finishing touches on their 2009-11 budget proposals, there is still time to shift the focus to needed reforms to ensure the state is moving towards a performance-based government.

One way to facilitate this debate could be to review just how well the state is following the current performance-based budgeting requirements already in law.

JLARC (Joint Legislative Audit & Review Committee) is the perfect vehicle for this type of exercise. If interested, lawmakers could insert a proviso in the budget for JLARC to review current requirements in the statutes governing budget development. It could direct JLARC to:

Evaluate the executive branch’s performance measurement requirements related to budget requests and budget development (RCW 43.88.030 and RCW 43.88.090).
The study will focus on these statutory provisions by evaluating the extent to which:
(1)    State agencies establish goals for achieving results that conform to statutory direction and limitations.
(2)    State agencies establish quality and productivity objectives that are outcome-based, objective, and measure progress toward goals.
(3)    The office of financial management assists state agencies with the development of performance measures.
(4)    State agencies budget requests link performance measures to achievement of quality and productivity objectives.
(5)    The office of financial management analyzes whether the measures for state agency activities are demonstrating progress toward objectives.

(6)    Agency budget requests !
include proposals for improvement when the office of financial management identifies insufficient progress toward goals.
(7)    The governor’s biennial budget proposal includes indicators that demonstrate measurable progress toward priority results.


Although the current budget proposals reduce JLARC’s funding, lawmakers should weigh the benefits of directing JLARC to conduct this type of review to help lay the ground work for the Legislature to move towards performance-based budgeting.

Will your state tax bill go up?

April 15, 2009 in Blog

By now you’ve either closed the books on the 2008 tax year or are putting the finishing touches on your tax return. If you don't by midnight, however, you’ll be hearing soon from the IRS and becoming intimately acquainted with what it means to face federal tax penalties. 

But just because you can put last year’s taxes behind you doesn’t mean it’s too early to look ahead to what your bill may be next year. In fact, if some state House and Senate Democrats have their way your 2009 state tax bill might be much higher.

The current debate in the Legislature is whether to put a tax increase package on the ballot for voters to approve.

Senate Democrats are leaning towards an income tax for the “rich.” House Democrats are tossing around a “temporary” sales tax increase.

Meanwhile 32 state and national economists have warned that tax incre!
ases will damage Washington’s economy and hamper economic recovery.

The state's editorial boards have also weighed-in urging lawmakers to balance the budget without tax increases. Here's a sample of those pleas for tax restraint:

Technology Tax Creep -- Washington State Style

April 14, 2009 in Blog

Ok, so apparently playing off of yesterday's posting about the New York Post's story on new wireless taxes and fees for New Yorkers, lawmakers today introduced HB 2351, which would raise the e-911 fee for wireline communications. The fee would raise the current county tax from $0.50 to $0.70 and the city tax from $0.20 to $0.25. This would result in an extra $3.25 per year in fees (about $11.40 total) and represents a 40% increase from current levels. This fee would go largely towards funding new equipment to handle newer communications technology. But every year the rate would be adjusted based on the state's "enhanced 911 coordinator." So don't expect the fee to go down.

But there's a catch and one I a!
m going to need some follow-up on. This fee will be extended to VoIP (Voice over Internet Protocol) phones, which were previously exempt. This is a big change. As I've pointed out in the past, people are fleeing traditional wireline telephones as if the old phones were covered in the ebola virus. 

Mostly, consumers are dropping their wireline service for a cell-phone only plan because the barrier to entry on cell phones is so ridiculously cheap. (Seriously, how many people above the age of 18 do you know that do not own a cell phone?) Recapturing some of this lost revenue is one of the reasons for this bill.

But people have been taking advantage of the cheaper VoIP options as well, largely because VoIP services are also inexpensive and allow you to call pretty much anywhere in the U.S. for one low price. And because VoIP c!
urrently is regulated by the FCC and not the state's Utili!
ties and Transportation Commission, it can be offered in the bundling packages from cable and phone providers for a further discount.

So here's my question. What about non-stationary VoIP services? Specifically, services such as Skype? A Skype Pro subscription lets you use your computer as a phone and so all you need is an internet connection and I can call anyone and anyone can call me. Skype does say that it is not, and cannot, be used for emergency purposes, so I am guessing that Skype-type VoIP services are exempt, whereas Comcast/Verizon/Qwest VoIP subscribers will have to pay.

As a subscriber to both Skype and a traditional VoIP service, will I have to pay twice?

Traffic relief, mobility, market demand, freight & public/private partnerships

April 14, 2009 in Blog

Five Principles of Responsible Transportation Policy

Policy Center encourages five principles of responsible transportation
policy to help guide policymakers in returning to a system that
provides people’s freedom of movement.biz

• Tie spending to performance measures, like
traffic relief and economic development

• Respect people’s freedom of mobility

• Deploy resources based
on market demand

• Improve freight mobility

• Use Public/Private Partnerships

Read the 5 Principles of Responsible Transportation Policy legislative memo here.

You can also view or download the Five Principles brochure here.

The Senate takes an important step to restore arm's length transactions with unions

April 14, 2009 in Blog

Last night the Senate voted 30-20 to pass an amendment to a bill, HB 1329, which considerably slowed down the union-led effort  to force small day care workers into a union.  A study will now be undertaken to determine if collective bargaining improves quality of day care or benefits for workers, or not.

Richard Roesler's blog points out that critics of the bill were also uncomfortable with a provision of the bill that would have taken union dues directly out of the state's subsidy payments, instead of directly from workers.  (This involves a considerable sum of money---$6.1 million in dues from subsidy payments to the union of family day care providers.)

Last legislative session, we pointed out in the Seattle PI here that the proposed bill would turn the state into a bill collector for the union, essentially allowing the state and union to act as one party for the purpose of dues collection, threatening the interest of the public and taxpayers to understand what is really going on.  I said : "When you have a contract, you are supposed to have an arm's length relationship so that the interests of the parties are clearly defined and not veiled to the public."

Another analogy can be made here to illegal contracts of adhesion, which are contracts so imbalanced in favor of one party over the other that there is a strong implication it was not freely bargained, for example, a rich landlord imposing onerous contract provisions on a poor tenant, or a large and powerful union imposing onerous contract provisions on small day care centers.

By passing this amendment, our legislators have demonstrated their understanding of the need to put a powerful union at arm's length from the state.  The legislature is wise to prevent the deduction of union dues from state subsidy payments.  The legislature should consider that the same lack of arm's length, the same appearance of impropriety, exists when the state directs day care centers to deduct union dues from workers' paychecks. 

Every other professional organization (Bar Association, the American Institute of Architects, the Professional Engineers, the Association of General Contractors, to name just a few) has to collect dues from its members without help from the state.   Why is the state in the business of helping unions collect their dues?

Legislators should extend this arm's length thinking to other contracts with other unions.  Local school districts automatically deduct teachers' union dues from their paychecks.  This allows powerful unions to act like rich landlords, forcing school districts to agree to contracts they cannot afford. 

State unemployment rate now 9.2%

April 14, 2009 in Blog

The state's Employment Security Department released March unemployment rate numbers for Washington this morning. The rate is now 9.2%. This is almost a ten percent rise above February's 8.4%. The federal unemployment rate for the month of March was 8.5%. 

It is important to remember that unemployment rate numbers are a lagging economic indicator -- meaning this is a look backwards to assess the past month in regards to job levels. There are other economic indicators that are more forward looking (ala stock market, construction permit levels, etc.).

Earlier this year, Washington state Economic and Forecast Council director Arun Raha indicated that he expects the unemployment rate to top out around 10% in 2010. This is despite the fact that some areas of the economy see!
m to be bottoming out. Even if the economy "turns around" in 2009 3rd quarter, don't be surprised to see a continuation of jobs lost.

The U.S. economy has lost just over 5.1 million jobs since it's December 2007 peak. Washington's nonfarm payroll has declined by almost 100,000 jobs since March 2008.
According to the ESD release, practically every sector of the economy lost jobs. The construction industry was hit hardest; accounting for half the job losses in the goods-producing industry and March marked the 14th consecutive month with employment declines in this sector. The financial services industry also was hit very hard, losing 9,000 jobs. Professional and business services shed 16,100 jobs. 
But government reflected year-over-year growth of 4,400 job!
s. The federal government expanded by 1,600 jobs, state govern!
ment by 1,100 jobs and local employment by 1,700 jobs. 
Back in March 2008, Washington's unemployment rate was 4.8%. Today's numbers represent a 92% increase. 

Green Bonds - are they worth it?

April 14, 2009 in Blog

Today the House Capital Budget Committee will consider HB 2334, asking voters to approve a $3 billion package to fund capital improvement projects that promise increased health, safety and energy efficiency in public facilities.

Supporters of the legislation claim the bonds would be repaid in part from cost savings of improved energy efficiency.  In addition, proponents highlight requirements to use performance based contracting to achieve the savings.

Unfortunately, these claims are misleading and could potentially threaten the bond ratings of other investments.

Proponents of HB 2334 are wrong to tie promises of energy savings to cost repayments through performance based contracting.  Performance based contracting was established as a tool to ensure that, when a contractor makes promises through a contract, results are achieved.

The State's General Administration (GA) website provides a good explanation of how the State has used performance based contracts on a variety of projects, with promising results.

According to the site about 100 projects have used this system.  These projects have cost taxpayers more than $150 million to complete with a claimed savings of roughly $11.5 million annually.  At this rate of return it would take more than thirteen years to pay back the costs of all of these projects.  These numbers, however, have several flaws.

For instance, they are not audited and it is difficult to promise actual energy savings.  When a building uses the performance based contract process, an inspection will identify what systems can be changed to achieve greater efficiency.  If the agency chooses to change light fixtures, a contractor can promise savings from changing each fixture because they are essentially changing light bulbs for more energy efficient bulbs.  The contractor, however, does not guarantee that the light fixture will be utilized or operated in the same manner as the previous fixture, and, according to the GA, is unlikely to promise a return on investment through cost repayment.

The "annual savings" identified by the GA's spreadsheet are snapshots in time and are not meant to predict actual savings.  The GA is honest that these numbers do not represent actual, audited energy savings.  Given the difficulty they are having identifying those savings in the current, modest program, how likely is it that they will do better when the program spends thirteen times as much in a two year period over what was spend during the past 10 year period?

Given the amorphous nature of the energy savings estimates, is it wise to base the State's bond payments on hoped-for, but hard to recover, energy savings?

While it may be true that the money spent will provide greater health or safety improvements, there is no data available to suggest that this results in cost savings.  In fact, as our research shows (What Washington's "Green" Schools Tell Us about HB 2334's $3 Billion Spendnig Plan), such modifications to systems that would improve air quality, like an HVAC system run more frequently to bring in fresh air, often results in higher energy cost.  Savings have yet to be realized as was promised in previous energy saving packages.  The performance data available thus far for "green" schools provides legislators with a valuable tool for better understanding the promises of cost savings and energy efficiencies in HB 2334.

In addition, the proposal to increase the indebtedness of the State has caught the attention of Democrat State Treasurer Jim McIntire.  In a statement regarding the $3 billion bond package he noted that, "added debt called for in HB 2334 is too much" and that, "It would threaten our credit rating and would affect the rest of our investments in transportation and public infrastructure."  Harming the credit rating could lead to an increase in rates and additional cost to the taxpayers, minimizing further any potential benefits from the proposed projects.

Finally, if these projects will truly deliver the claimed savings, one has to wonder why they were not funded when the state had surpluses.  The State's 2007-09 biennial Capital Budget is $4.6 billion and the 2009-11 proposed biennial Capital Budget before the House is $2.9 billion with the bonds making up approximately half of these budgets.  Increasing the debt to fund projects that have not met priorities when funding was available makes the return on investment even more unlikely.

As the House Capital Budget Committee considers HB 2334 it is important to understand that the proposal before them over promises on what it can deliver.

Retraining teachers has not worked to improve student learning

April 13, 2009 in Blog

Today, the Port Orchard Independent published two letters reacting to my editorial "Our schools need better teachers, not more money." The first letter concludes that "the entire education system is out of whack, and money isn't what it will take to fix it."  The second letter states that in order to have good teachers, we have to pay extra education dollars for "coaching, training, development, performance management, classroom audits" and such.  

More money will not fix our schools.  Only better hiring and spending decisions at the local school level will improve our schools.

We have already spent billions of dollars to raise teacher quality.  Between 1993 and 2008 the legislature spent over $5 billion in 80 education reform programs aimed at teacher training and other efforts--see Appendix to our Education Reform Plan.

Yet only 19 students out of every 100 manage to earn an associate or four year college degree. Many of the kids who make it to college drop out, as they have not been prepared for the rigor of college by their K-12 education.

As the most important factor for student learning is the quality of the teacher, why can't we allow principals to hire the best possible teachers (by not limiting the hiring pool to those who hold a credential) for the classroom?  And why can't we allow principals to control their budgets, so they can spend education dollars in the best way possible to reduce student loads on classroom teachers--a reform which is now working in other states to raise achievement?

Pouring more money into a dysfunctional, broken system will not improve our schools. 

Paid Family Leave to be Officially Delayed?

April 13, 2009 in Blog

That looks to be the case. Senate Bill 6158 delays the system implementation date from October 1, 2009 to October 1, 2012. It is evident the legislature recognizes the financial difficulty the state is in and that piling another expensive government benefit on top of everything would be irresponsible.

But by simply delaying for three years its implementation, policymakers are gambling the state and national economy will have turned around enough that no one will notice this potential payroll tax. Chances are good that the "Great Recession" will be a blip in our rearview mirror -- and besides, there's always less resistance to expanding government when times are good.

We'd rather see it permanently go away -- to be handled by companies on their own -- but at least there seems to be an acknowledgement that new and expansive government !
programs have a direct cost on citizens and therefore should be avoided when times are tough.