New numbers? No. - WA OFM

The new OFM Six-Year Outlook made it to the front page this week under the head "State goes from feast to famine on budget" (TNT, 4.26.06). This is not the budget hole we have been warning about the state dropping into, so we won't be doing any gloating, yet.

The omelette may have one fewer egg in the latest OFM (Washington Office of Financial Management) recipe, but it is not "feast to famine." We've had a couple of good years, but our family is growing and the farm is not. Under the leadership of Chris Gregoire we have a year's worth of canned goods in the cellar and we've stocked some staples, but there ain't no feasting in this house.

The "respite from budget woes" that will "end abruptly" is really only the underlying deterioration agitated by a bit of this and a bit of that. Most of it is mandatory, a bit of it the few new initiatives from the last session.

In fact, there are no changes to projected revenues from the February 15 version of the Outlook, and it is revenues that worry us. The housing boom is tapering off and higher fuel prices will squeeze retail sales. Even before that, where OFM sees a 5% underlying growth, we put it at under 4%. But maybe they are waiting on Chang Mook Sohn and the Office of Forecast Council to tweak revenues. [Not that oil prices and the Forecast Council have agreed on a direction yet. They're still debating. During the session, Mr. Sohn suggested prices in the $50-$60 per barrel range. A couple of years ago, the Council's forecast came out projecting a retreat in oil prices to under $30 just before they took off. Now they are $70-plus and rising.]

The whole budget situation was, of course, obfuscated immediately by Republican state senator Joe Zarelli, who threw out his tired old pitch and labeled it a "spending problem." I wish he would direct his remarks to his own party and the federal budget that is driving this country into the ditch.

Helen Sommers is chair of the House committee assigned spending (Appropriations). She points to the "unbelievably high costs in the medical area." Elsewhere there is mention of 12 percent "inflation" for medical assistance.

"Inflation" is a term for a general rise in the price level. A specific rise is called a "cost increase." It may be driven by increased participation in a program, or it may be an increase in the unit cost of a particular good or service, but there is not specific "inflation." This messy language messes up thinking, and it's been there for at least five years. (I know, "picky-picky.")

The substantial point is that comprehensive health care reform could solve everybody's problems. My friend who lost his job has VA coverage. But his wife doesn't. Nine hundred dollars ($900) per month. The state budget has big bills for the uninsured, partly insured, and a host of employees. Likewise the Feds and the local governments. Likewise businesses of every kind and size. This health care crisis is an inflating ring around our necks, and it's going to choke us all.

It needs to be dealt with as a particular cost increase. It is acute, not chronic.

Look for a fuller examination of the OFM Outlook on Prediction Tuesday in two weeks.

Fix your own house, Sonics

Ultimatum: Sonics, Sonics owners, NBA -- Step up to a little responsibility your own selves. Millionaire owners and millionaire players want taxpayers to pony up $200 million for another re-do of the Coliseum, this one mostly so the team can seal inside whatever economic benefit there is to having them in town.

Hello, NHL, as Omir the Storyteller suggested in his comment to our last Sonics post.

David Stern, Sonics GM Wally Walker, and Sonics principle owner Howard Shultz have been playing tag team wrestlers on the city council, with governor Chris Gregoire officiating. So far it's been lots of flaming leotards and smack vs. a brick wall.

Fix your own house. And I'm not talking about Key Arena. I'm talking about the financial mess of a league that requires an annual payroll for 12-15 players of $80 million, generates a business you need $200 million to buy into, gives tax breaks of three times operating losses, and still requires extorting more from the citizens. It's a monopoly run amok. Come up with something that gives us some choices or protects us from you having no competition.

The NBA proved itself a methodical monopoly when it absorbed women's basketball. It started its own league, then ran the competition into the ground via the television contract. But enough is enough. It's time for these guys to clean up their own business so teams compete on the court, not in my wallet.

And if they don't?

I'll do nothing.

Which is exactly what the Sonics ought to do for the remaining three years on their lease.

David Stern, NBA Commissioner, refuses to take any responsibility.

"I would say that the city is making it pretty clear of what they want us to do, and we'll accommodate them."

Huh?

What I mean is they're not interested in having the NBA there. We understand that, we understand that there are competing issues, and the mayor is free to make whatever decisions he needs to make and I support that. But that's a pretty strong signal and I think that the existing ownership has said they don't want to own a team that's not in Seattle, so I know what they're in the process of doing. So we'll just see how this play ends."

It's a weird strategy for the NBA to throw away Seattle, because that's what they're doing if they insist on a price that is this ridiculous structure and its gametime-only amenities. If the national economy turns down, it may be that Seattle has the only lights left on outside the oilfields. It would be a good place to have a sports franchise.

[We really ought to look into these tax rules. According to the Seattle Times, a kind of depreciation on player contracts is allowed "for the first several years after they buy a team" which can be used against other tax liabilities.(?)(!) Could it be the "losses" are soon going to become losses, as in real money, and this is what is generating the interest in new revenue?]

The suite owners are already writing those costs off their corporate taxes. The bonds that financed the last remodel are tax exempt. Since Washington has no state income tax, the players (several earning over $5 million per year) pay more into the general funds of other states than they do into Washington's.

So the citizens are doing their fair share.

Thanks to the Mayor and Council for not caving in.

We'll see how the play ends.

# Posted by Alan : 8:33 AM

Sonics Recap

The Sonics want a theme park. The Seattle City Council doesn't want to pay for it. What are the economics?

First, the financing....

Key Arena was renovated last in 1995, to the basketball team's specs, with money from revenue bonds. Revenue bonds actually use money generated by the building to pay for its construction, a concept that was called "unique" .... Of course, they are tax-free bonds, so even these imply a significant public subsidy.

As late as October of ‘03, Sonics head man Wally Walker said, "Key Arena is a wonderful place to watch a basketball game. We are not unhappy with it." (PI, 10.20.03)

Then, as councilmember Jim Conlin puts it, "for reasons on which the interested parties do not agree," the revenues betan to fall short, and the city began to pay debt service out of the General Fund.

During this past legislative session the team pitched the legislature with a plan for a $220 million reconstruction of the Key to be financed by an extension of the current hospitality taxes. The new rehab was not so much to improve the "wonderful" basketball arena as to create internal capacity for dining and drinking .... Financed by taxes on restaurants.

Like Disneyland... The creation of Disneyland's Orlando site came about because the company looked across the street in Anaheim and saw all those motels and fast food stores making big bucks off being across the street from Disneyland. So the company built where it could own "across the street," capture the positive externalities, as it were. That's what the Sonics want to do. So there goes the last fig leaf of economic benefit for the city. Oh, and after the city builds it, the Sonics want to run the new building.

Now the politics ....

The city council was not too happy about the broken spokes on the revenue bond wagon. Times are tight in a post-Eyman world. So the Sonics went directly to the legislature, and they brought in David Stern, NBA commish, Mr. Fatuous, to say "A substantial amount has been done for the baseball and football teams. I'm here to personally find out whether the same is being considered fairly for the NBA. If not, that's a decision we can accept. But we'll have to act on it ourselves."

Meaning they'll move the franchise. And not to Bellevue. Oklahoma City, maybe.

Stern called the Key Arena deal the "least competitive lease in the league."

But sports are popular. Especially when the team is winning. Openly opposing a stadium or arena is a good way to get unelected. Gary Locke's finest hour was in leading the fight to keep the Seahawks in Seattle when they tried to sneak out the back door.

The current Guv did not object to the Sonics' request, but insisted that they get agreement with the city and then have a public vote of the taxpayers. Neither came true.

That brings us to the economics ....

A 1922 Supreme Court ruling essentially exempted pro sports from monopoly control because they are "exhibitions" and not interstate commerce. For many decades team owners used their monopoly position to exploit fans, and they used their monopsony (single-buyer) position to exploit the players. When players won free agency, they joined the owners in exploiting the fans.

There is only one league in each sport, baseball, hockey, basketball, football. Leagues intentionally keep the number of franchises below the number of markets which could support them in order to extort concessions from cities and arenas and to keep the value of the franchise high. If competition shows up, they coopt it or suppress it.

The supposed economic benefits for a city of having a team do not exist. Check out the bomb blast zone around Royal Brougham, the site of the baseball and football fields. Ringed by parking lots, the facilities are cut off from the surrounding area. The only businesses benefitting are a few in Pioneer Square catering to beer sucking.

One estimate is that a sports franchise has the economic impact of a small department store, hardly what you'd spend $220 million to keep.

The jobs are primarily low-wage seasonal jobs. The three dozen (max) good salaries in the Sonics organization don't stick very close in the off-season. (It's ironic that California and New York, with income taxes, actually see more contributions from Sonic players than Washington does. Incomes are pro-rated and allocated to the sites where teams play.)

The bottom line ....

Maybe Howard Schultz will sell or move the team. Fine. We'll just get a team from the other league. What? No other league! Talk about non-competitive.

I love to hate the B&O, but ...

The State's Business & Occupation tax (B&O) remains one of the worst taxes ever anywhere. Its base of gross receipts penalizes small business, growing business, in-state business, investing business. But worse is the myriad of baby B&Os that dot the Puget Sound region in the revenue architecture of three dozen cities. These baby B&Os are taxes separate in form and application from the State's version and until recently from each other. Their main purpose seems to be to create complexity, inefficiency and resentment.

So personal consistency was abandoned this week when I dropped a memo on Tacoma's Revenue Task Force proposing an expansion of the city's B&O as an alternative to city manager Eric Anderson's property tax based initiative. The memo is in two parts, a critique of Anderson's proposal and an outline of the alternative.

The alternative uses a reformed city B&O to target bigness and nonprofits, both of which are underrepresented at tax time. It drops well more than half of the smaller businesses from the rolls and thereby reduces compliance problems and further mitigates some of the bias of the State's B&O. Plus, it dispenses with a statutory dance with the legislature needed to squeeze the holdings of nonprofits into the city manager's proposed property tax base.

Of course, it is all still in the conceptual stage. The reception was pretty good at the Task Force meeting. But questions were many, and there was the requisite challenge from the Chamber of Commerce representative. At least it opens up the range of options. And it certainly enlivened the debate.

Get in the shoes of the taxpayer

We progressives make a big mistake when we insist that the only fair reform to state taxes is a personal income tax.

Bill Gates, Sr., busted the effort of the 2002 Tax Structure Study when he obsessed during legislative hearings about the virtues of the personal income tax. For one brief moment, he had the public's attention on this difficult subject. He ignored the Commission's first and best recommendation – to scrap the albatross of a B&O tax in favor of a subtraction method value added tax, and talked at length about income taxes. The public just shrugged it off as more of the same, and a great opportunity was lost. (Our "Basic Reform to the B&O Tax" accomplishes the intent of that recommendation, by the way, without all the folderol of scrapping one form and starting up a new one.)

Yes, a personal income tax is a fairer tax, and would be preferred absent the obvious political realities – and absent the tax structure realities facing the average taxpayer. The taxpayer is already faced with a personal income tax from the feds, and a payroll tax that is being operated as an adjunct to the income tax. She may be forgiven for not wanting another deduction on the pay stub.

I remember sitting in a House Finance Committee in Olympia and listening to Rev. John Boonstra of the Association of Washington Churches and the Tax Fairness Coalition. He gave impassioned testimony about how voters would respond responsibly if only they were given the straight scoop about the progressive advantages of an income tax. I thought it was a noble naivety, a feeling similar to the one from listening to Bill Gates.

Then the same feeling came over me the other night as I listened to the firefighters' local president Pat McElligott insist that voters would support new property taxes once they understood what they were getting for their money. Pat probably had the best case, but none of the three appreciated the difficulty of talking about taxes to the average citizen.

First, the word "tax" has been given the connotation of leprosy or incest in a targeted effort by the Radical Right to reduce the size and scope of government. Realizing that public programs like Social Security and schools have wide public support, the Right has chosen to focus on the financing mechanism – taxes. And they have largely been successful. People who would laugh if you told them they could have a house without a mortgage now sincerely think they should have public services without paying taxes.

Second, there is a cacophony of talk the average citizen has to sort through in dealing with taxes, and very little of it is economically informed. I watched a video produced by a city government with real citizens talking about where their tax money goes, how they didn't realize where it goes, and how they were happier when they realized it goes for this or that. Taxes don't "go" anywhere. They stay right in the community. More than eighty percent of your tax money goes to pay the salary of a fellow citizen. Match that with where your money goes at the gas station or the mall. This is an important thing to understand. If small business were not enthralled with fairy tale capitalism, they would understand that government not only provides services they need, but keeps market demand in the neighborhood.

Lastly, though, we need to see the tax structure from the taxpayer's point of view, not from the government's point of view. Instead of talking down to them, we need to get behind them and see things as they see them. State tax reform, as I said, often gets stuck on an income tax as if it were balanced. It is balanced from the perspective of state government, but not from the standpoint of the one who writes the checks. Voters distrust anything new in the realm of taxation, so when they don't see balance where it is advertised, they don't stop to listen to the rest of the pitch. Real balance would come with a turn to business taxes, broad-based, equitable business taxes founded on ability to pay.

Reforming the B&O in a way that generates revenue and ends the free ride of the big corporations will look good taxpayers (he said, with charming naivety).

State Housing and Employment

Cheery news always sticks to the top of the Business page, while grimmer news seems to slip into the fold. Housing slows and its, "Home buyers don't have to pull the trigger as fast." An uptick in the jobless rate, "No problem... There is really no negative to put on this." (TNT) I'm here to put the negative on it. And the second Tuesday is now prediction Tuesday for state and local economic numbers.

While the overall economy in Washington will fare better than that of the rest of the country, as we enter the second dip of the Bush recession, state and local revenues will suffer, housing will suffer, and employment will suffer.

Housing

Home sales in most of the state have reached their peak. King County's will top out pretty soon. By this time next year (end of February reports), home prices will be down 5 to 10 percent in King County and 10-20 percent elsewhere in the state. Here are our benchmarks.

Actual February 2006 median home sale prices

King County - $345,000
Pierce County - $250,000
17-County Area * - $283,000
(*covered by Multiple Listing Service)

Predicted February 2007 median home sale prices

King County - $325,000
Pierce County - $220,000
17-County Area - $250,000

Picking the peak of a trend is the most difficult. Things tend to trend over long time periods. Can't find anybody else making predictions about housing. If you see some, drop us a line.

Employment

Employment growth will be nonexistent in Washington over the coming year. That is, zero job growth. I am not going to predict the unemployment rate, because it's been boogered by the Bush team and I haven't got a handle on it.

Background from economist John Williams:

"Richard Nixon had a highly publicized war with the Bureau of Labor Statistics on the unemployment data. Nixon wanted to report the unemployment rate as the lower of the seasonally adjusted or unadjusted number, at any given time, but not specify same to the public. While that approach was unconscionable at the time and never used, basically the same methodology was introduced in 2004 as "state-of-the-art" by the current Bush administration."

I just played with some employment growth v. employment rate figures from the 2006 Economic Report of the President. Clinton added 18.4 million jobs in his eight years. The unemployment rate dropped from 6.9 to 4.0. Bush added a total of 4.8 million jobs in five years, and the unemployment rate rose only to 5.1. Supposedly its down to 4.7 now. Something is very funky. I'll give you a chart next week.

State Revenue

Tax revenue growth has been set at 5% by OFM's chief forecaster Irv Lefberg. I've tried to budge him, but he's sticking to it. (Actually official baseline growth is only 2.2% next year, but it jumps to 5.7 in 2008 and continues at about 5 percent thereafter.) Barring legislative action, revenue will grow substantially slower -- 1.1% short term and 3.0% long term.

Tacoma Taxk Force Underway

Tacoma's Revenue Task Force is accelerating rapidly. We may not be going very fast yet, but considering we started at zero mph, the acceleration is great.

The City Services Tax Task Force was nominally created by the city council, but more by the effort of new city manager Eric Anderson. He wasn't on the job six months before he recognized the long-term squeeze Tim Eyman and the rest of the deadbeat dads have put on the city's revenue.

At our first meeting we introduced ourselves and listened to the Finance Director and pretended we knew what we were supposed to be doing. At the second we heard from Anderson and got some of our own ideas on the table.

Anderson carried in from Iowa and Illinois an idea of spreading the cost of basic city services – police and fire – to all those who benefit. Seemingly an admirable sentiment, except when those free riders are powerful nonprofits like hospitals and private universities. In an earlier life, it had been Northwestern University. Anderson tried to enact a tuition tax, and "it took four days for the legislature to pass a bill outlawing the idea."

In Tacoma, it's the University of Puget Sound and the hospitals surrounding Wright Park. Two people from UPS are on the task force, David Droge, a professor in small group dynamics and task force chair, and John Hickey, from the business office. Nonprofits have two representatives as well, Liz Heath and Mike Renner.

Anyway, Anderson's idea of extending taxation to nonprofits is going to get a severe review. (Prior to our meeting with Anderson last week we were set to see a video on property tax. The television showed a few seconds of the news as the video was being cued. The image was of the effigy of somebody, maybe George Bush, in flames. "That's part of our video," Anderson said. "Right after my last meeting with the nonprofits.")

To me, anyway, the key is not the nonprofits, although the idea of taxing them is certainly the issue arousing the most heated debate. The big ones can afford to help the city out. The little ones we can let go. There's not enough revenue there to make it worth trying to collect anyway.

The key is Anderson's idea of using the property tax as the vehicle. At the outset, we need the okay of the legislature to tax the property of nonprofits. It's allowed, but only to fire districts. Then he proposes abandoning the city's B&O, abandoning the city's 1% of the sales tax, and expanding the property base by the holdings of the nonprofits. This new base would be responsible for perhaps 75% of the city's general fund expenditures. Since right now the property tax is only about one-fifth of revenues, even if nonprofits expand the base 30 percent as Anderson estimates, the shift of the load means a bump up in the rate of 2.3x.

Billing monthly is part of the plan, and that would take away some of the sting, but not enough to get by the voters, I'm afraid. And it will need to go past the voters, not only at the beginning, but periodically. That's the last part of the scheme, to submit increases to a "city services referendum" periodically to the voters, allowing them to choose whether they want the services or the few dollars a month they'd save.

There are two other major troubles connected to a big shift to a property tax base. First, the size of the increase would mean a renegotiation of tens of thousands of private contracts between landlords and tenants. Not a happy event for either party. Second, the property tax is not exportable. Tacoma residents traveling to Seattle to shop leave a little in the kitty in the form of the sales tax. Seattle residents in Tacoma should return the favor. Likewise, the B&O tax is collected from businesses operating in the city, whether or not they have property here. The property tax, by contrast, is paid almost exclusively by Tacoma.

I have an alternative based on using both the B&O and property taxes which retains the advantages of transparency and accountability from the Anderson proposal. I'll post it or a link to it after I submit it to the group next week.

One good thing, we changed the name from the City Services Tax Task Force to the Revenue Task Force. Try saying City Services Tax Task Force.

Sonics Redux

The Sonics are setting up the town and the legislature for a $225 million renovation to Key Arena, to be paid for by the grunt taxpayers. It would be one thing if this were for the benefit of the average fan, but the average fan can't even afford parking, much less a ticket.

No, this whole thing for the benefit of high-rollers. The owners are high rollers, the players are high rollers, the improvements are for suites for guys who averaged $100,000 in tax breaks from George W -- that's a high roller (and they don't pay anyway, they charge it off to the company which deducts it from taxable income).

But we have to do it, Ollie, so they can buy the best players and coaches. There's competition from the Seahawks and Mariners who have this fancy stuff and now the guys with dough want it at the Arena. The Sonics might run off to ... ah ... Kansas City. Besides, you want us to win the championship, don't you? Our Sonics.

Right. Mr. Sonic is coaching the Portland team because they gave him a $27 million contract. If not for a salary scheme that encourages it, a lot of these multimillionaire players wouldn't be here either.

It happens year after year. Here or somewhere else. Pay up or we'll leave. These national sports leagues extort new facilities for the benefit of their players and owners. They may have psychological needs that make them thrive on the competition of the game, but they never really lose. The only real losers are the cities and their taxpayers. The race for the championship is a one-up game, a race to the top for the team, but a race to the bottom for the city.

The Sonics say they are losing money, but if they sold the franchise today, they would recoup every penny they've spent and pocket a bundle besides. I went over it in a post last year.

It's time for a National Basketball Cities Group, a cartel of cities so they can talk on the same level to the NBA owners and the NBA Players Association. Competition on the court is fine, but competition between cities on who can give away the most money? No. The group could set a standard for the support they're going to give these teams. If the teams didn't like the standard, let them build their own arena. What a concept. If they moved, that city could offer the arena to a team in the other league for free.

You've got it all wrong, chile. There is no other league. The other league is the CBA. Guys there don't make but one percent of what they make in the NBA.

No other league? Man, that looks like an opportunity to me.

Rainy Day Fund

"First, assume the can opener," said the economist to his fellow castaways. The motley group was tranded on a desert island, surrounded by miles of open sea, but blessed with the unlikely good fortune of having cases of canned goods float in on some wreckage. Unfortunately they had no way to open the cans. All the suggestions were messy or impractical, like hurling cans from atop the palm trees onto rocks or gnawing them open with their teeth. The economist penetrated the situation with logic.

You might say those of us who advocate a rainy day fund are like the economist assuming the can opener. We call for it when we need it, but forget about it when there is a surplus. (You might say that, I don't.) Here we have a budget shortfall. Wouldn't it be nice to have a rainy day fund so we don't have to raise taxes. Sheesh, of course, a rainy day fund instead of taxes. A no-brainer. So we set about creating a rainy day fund from our imagination. See how practical we are?

I was reminded of this when I was visiting Bellingham last weekend [to see a brilliant student production of Jean Anouilh's Antigone directed by Emily Harvey, a junior in the theater program there]. I stayed over with some friends, and the next morning opened the Bellingham Herald and found a piece by Dick Startz of the UW's Economics department.

Professor Startz does better than most. For example, he understands that job growth is the most reliable general-purpose economic indicator. He recommends not allowing a raid on the rainy day fund unless job growth is below 1%. That's fine.

But, a reminder: We don't have one to raid. Professor Startz implicitly suggests constructing one from the current state budget surplus. But as I've said here before, this surplus is really only a temporary cash flow anomaly. The "plus" now is from the housing boom. It will be a minus later, probably carrying over the same exclamation point.

Governor Gregoire has the right idea. Her $900 million in reserves does not constitute a rainy day fund, but a simple set aside for next biennium. Mandatory expenditures await us there that will swallow up the $900 million and come looking for more. (Did you see her State of the State speech where she was gesturing up and down to demonstrate the roller coaster. Made me queasy just to watch it.)

Now, on this stage, your humble servant is going to do what the economist on the desert island could not, what in spite of his endowed chair and many honors Professor Startz could not. I am going assume a rainy day fund that could actually come into being. Now. Today. Present tense. (Could. I'm not saying should.) Ready?

Debt-financed! Ta-da!

Yes. We borrow it now before interest rates get out of sight, and pay it back in good times.

Why is this better? One: We could have it when we need it. Two: Reducing state spending to fill the fund in good times, even if it were politically possible, would depress economic activity without a good reason. We might be forced to use our rainy day fund before we could even admire very long. State spending and services are key supports to our economy. The idea that government is a vampire feeding on the vigorous private sector economy is nuts. It is a story repeated often enough to gain currency among the easily persuaded, but it is still nuts. Three: It's cheaper to borrow in bad times. Not so much competition.

Objection 1: We cannot borrow like that. The state is required to balance its budget.

Wrong. Washington has a limit on the percentage of the budget going to debt service, and traditionally this has been reserved for capital construction bonds. But there is no constitutional requirement that the budget be balanced. (If you're about to rant about spendthrifty liberal pinko queers, check the federal budget deficit and your party affiliation, or log onto Tim Eyman and the Renegade Right. Then come back for a little liberal responsibility.)

Objection 2: You assume we can pay it back. With the current revenue architecture, that day will never come.

Touche. (Remember I said could?) It doesn't make sense to create a fund if we can't pay it back. And if you don't like debt financing, you're out of luck anyway, because we will never have a surplus big enough to fill such a fund. Our current revenues are barely adequate this year. They won't be in the next biennium and in all biennia thereafter. Budget drivers like health care costs on one side and eroding revenue from Eyman, et al, on the other, will open a gap that will never close.

Objection 3: We have no idea how big a rainy day fund should be. Downturns typically last more than a year. We want to get off the roller coaster, not just delay the drop.

Ouch. That's right. Some national groups have suggested five to fifteen percent of expenditures is a good size for a rainy day fund, but that not much more than an arbitrary, generalized guess. Individual states have idiosyncratic tax schemes and will thus have different variability from high to low. They have different economies as well, and different expenditure patterns. (The state with the biggest rainy day fund as a percentage of expenditures is Alaska. Alaska subsists on oil revenue, completely stable, not requiring any rainy day fund at all.)

I once calculated on the back of an envelope that Washington would need about 85 percent of its annual operating budget to completely iron out its historical ups and downs. That's $20 to $25 billion. Much more than the $5 billion that is most commonly talked about. Also much more than we could possible borrow for such a purpose.

But there is a concept that was once used at the federal level (when they knew what they were doing). It is called the "full employment budget." You may remember "structural deficits." Structural deficits were calculated from what revenues and expenditures would be at a level of "full employment," assuming away the current actual economic situation. This revealed the underlying adequacy of revenues (or excess of expenditures, if you like). The state of Washington has a structural deficit. A "structural budget" could tell us not only what size a rainy day fund should be, but would help us know what the baseline level of revenue should be.

A rainy day fund is only practical in the presence of a balanced and adequate revenue architecture -- the ultimate can opener.

The Globalization of Christine

Apparently I alone was disappointed in the Guv's trade missions this fall and winter. She liked it when she flew into China on a Boeing jet. She was impressed when she was driven past an office tower with Microsoft on the side. Then there was a Starbucks across the street from her hotel. Very cool. But best was when nobody in China had a problem distinguishing our state from the nation's capitol. In their eyes Washington is "like a small nation to itself," she said.

At some point in her travels she sat down with Flatworld Friedman and was wowed by the tremendous changes astir in the world, revolutionary changes. The bottom line is education, infrastructure, keeping us competitive in the global marketplace, keeping our citizens. Just wait till his next book.

Washington is a player. Christine is a player. The global industrial giants and brave new industries are players.

We do not want to be a player. Being a player means there are people in the stands. Those among us who are not endowed with the intellect, resources, or interest in the latest technological movement are just left to watch, sad victims of our own inadequacy. This includes continents full of people. It includes teachers and nurses and bus drivers, who are just quasi-players, assistant players, would-be players.

Friedman's Flat World is sandwiched between grotesque mass poverty below and a collapsing environment above. (You'll remember Friedman. He is the NYT columnist who was a major intellectual apologist for the Iraq invasion. He's given up on trying to explain how that misbegotten adventure might have turned out okay, if only.... Now he's gone back to his stock and trade in globalism. Friedman is not an economist. He took one class in college, and I'm not sure he passed it. He is a journalist).

No doubt this high-tech Flat World is going to be very profitable for some, but it is not going to be satisfied with Washington (state) unless we keep upping the ante. Outsourcing and developing new crops and revolutionary drugs and information architecture are in their most essential essentialness portable. Investment will turn a profit, and that profit will go wherever it's given the best deal. Citizens there can man the drive-up windows or trim the hedges or whatever.

Gregoire should remember her fight with the tobacco companies. Corporations have no loyalty except to themselves. A basic amorality is built in. Look at Boeing. Headquarters in Chicago. Look at North Carolina. Gutted its own business taxes and in so doing gutted them for every state. Phooey.

China is the big deal now, but where are they going? They make stuff for us, and we want to make stuff for them. They add the equivalent of two New Englands to their power grid every year. They pump untold tons of pollutants into their environment every day. Their rivers are sewers. Their aquifers are dropping like the drain plug has been pulled. They make everything cheaper because they're discounting the future as much as we are and they're paying their people less.

The technology we need is for clean water, clean air, rail and schools and roads for those who have none, for a transportation scheme that does not suck the life out of the planet, and for an energy technology not based on poisonous gases. Not just in Redmond, in Africa. Let's leave nobody in the stands.

This is the good stuff

The connection between Kitzhaber and Gregoire on evidence-based medicine was confirmed recently in a hearing before the House Appropriations Committee. John Kitzhaber is former governor of Oregon who is mounting a full-scale promotion of organized, sane health care. Chris Gregoire is the new Washington governor bent on making changes that make sense.

The podcast link to that hearing is here. The Appropriations Committee does it in other media too. It's great stuff. It is also leadership, figuring out where we need to go and setting about getting there.

I guess I'm behind the curve on this. I didn't realize drugs weren't measured against each other to gauge effectiveness. They're measured against a placebo. Part of evidence-based medicine ("evidence of effectiveness and benefit") is setting up comparisons between drugs and drugs or drugs and other procedures.

Surgical procedures are analyzed for effectiveness. The gastric bypass, for example, was determined to be effective, but only for the morbidly obese.

Providers are judged, too. If one clinic has a significantly higher success rate than another, why are we not funneling state business to that clinic?

What makes most sense is having independent analysts examine the material, the studies. People without a horse in the race judging providers, discounting biased trials and phony findings. They're doing this at the Oregon Health and Sciences University. John Santa from that school's Center for Evidence Based Policy was there to testify.

While Kitzhaber has said, "It's too late for incremental change," a good first step is getting state capacity in this area. State Health Care Authority administrator Steve Hill estimated 25 to 30 percent of the $4 billion spent on health care annually is wasted (compare to $350 million per year total budget for projects under the 9-cent gas tax). Only a fraction of this waste is in administration, the rest is "overuse, under use, and misuse in health care treatment."

Administrative savings in the health care field can be found aplenty, too. But don't look at government programs. That address is Private Corporate Health Care Insurance Company, Inc. For a good look at the enormous waste of private sector providers, see the folks at Health Care for All - Washington

The economic model is broken

"A substantial amount has been done for the baseball and football teams. I'm here personally to find out whether the same is being considered fairly for the NBA,"

NBA Commissioner David Stern before the Senate Ways and Means Committee on Thursday.

It's a tag team match! Yes, the Seahawks' billionaire owner got a new stadium, and before that the Mariners' billionaire owner got a new stadium, but before that there was a mega-million dollar remake of the Sonics' home. Heck, the bonds on the Key (funny how they forgot the name) aren't even paid off. The fans and the taxpayers are getting the stuffing beaten out of them, and now we're supposed to feel guilty?

Seattle is not alone. The same edition of the Seattle Times that had Stern in the Local section had an article in Sports with the header "Blazers future uncertain." According to Portland Trailblazer owner Paul Allen's spokesman Lance Conn "all options are on the table" because "the economic model is broken."

Yes, the economic model is broken! We're paying players and coaches literally millions of dollars a year and now we're supposed to pony up to build better suites for high rollers. It is just absurd.

It's the worst of all economic models, a monopoly run by millionaires where cities are manipulated into a financing contest with each other. "The team can't win unless we've got the money." Phooey. Let them play the game on the court, not in our wallets.

Restaurants are already taxed on everything that moves and some things that don't. Sales tax, B&O tax, lots of payroll taxes, syrup taxes, alcohol taxes, and probably some I don't remember. Meanwhile Ray Allen pays the same state tax on his $14.5 million salary (team total is $52 million) as the minimum wage busboy. The corporate honchos who rent the fancy new suites get a deduction. Even Key Bank writes off the cost of paying to put its name on the place.

If they really end up taking the team to Kansas City, I have an idea. A new league. Seattle, Tacoma, Portland, Spokane, Fresno, Boise, San Jose. A cities group sells franchises for, say, a million. The maximum public investment is set, so big markets can't play George Steinbrenner and break the small markets. Maybe a salary scale for players is included.

And then we play basketball. What a concept.

We might even be able to watch people like Wil Conroy and Tre Simmons without having to go to Fargo or Marseilles.

FYI, there was one coherent voice in the house at the Ways & Means Committee.

Message Testimony of SEIU 775 President David Rolf
Senate Ways and Means

Members of the committee, my name is David Rolf. I am the President of SEIU 775, with 30,000 members in the long-term care industry, in every zip code in the state.

I cannot imagine a lower priority for the use of the public's money then the purpose this bill anticipates.

This contemplated act of corporate welfare takes place within the following context:

Incomes are stagnant or declining for 2/3 of households. Health care costs are eating up a greater percentage of employee paychecks and employer profits, even while benefits get cut and hundreds of thousands are uninsured. The average home price is now out of reach for an average income family in Seattle . Tuition costs put higher education out of reach for some working families. Fifty-two percent of all baby boomers have no retirement savings besides social security and their home equity. And, of course, the impoverishment of nursing home and home care workers threatens the quality of care for tens of thousands of elderly and disabled Washingtonians. The profitability of a sports facility should not be a higher priority than the health care of frail elderly people, or education, or housing.

The indirect transfer of public wealth to private, for-profit sports teams should not be a priority of our government, under any circumstances, at any time.

If you do pass this bill, we urge you to authorize the use of this tax for housing, health care, arts, education, and social services, but not to help subsidize the profitability of professional sports teams.

Thank you.

Economic prognosis from the state's forecaster

I watched Victor Moore and ChangMook Sohn in front of the Senate Ways & Means committee Wednesday. Moore is head of the Office of Financial Management and was outlining the governor's budget. Dr. Sohn is head of the Office of Forecast Council, and he was there to predict revenues and economic events.

Moore did a good job, but I've covered the budget elsewhere.

One Note: Low-income heating assistance has already passed both houses and been signed by the governor. The Guv had called for speedy action. She got it. Kudos.

Quite a difference from the disgrace in the other Washington, where in an apparent fit of pique over losing drilling rights in ANWR, Republicans took federal low-income heating assistance off the table. It had lost its meaning as a bargaining chip. See December 27, NPI "Payback ..." post or CBPP.

On the revenue side, Sohn's revenue update for January 10 shows another increase to the surplus. Real Estate Excise taxes were up 6.5% and Revenue Act taxes (retail sales, B&O, utility, mostly) were up 4.1%, netting a neat $27.8 million. The update displays a drop in school levy collections without explanation, and what is likely to be a continuing disappointment in cigarette taxes (as smokers avoid the tax by stopping or smuggling).

To the committee, Sohn was slow in his delivery, but he was pointed on one topic. He said that while the acceleration of housing activity would level off, the sector would continue to be strong, and would not collapse. This and continuing higher oil prices were the two primary economic determinants for the coming year.

When asked about interest rates, Sohn pointed to the rise in short-term rates due to Fed action, probably to 4.75% later this month, while long-term rates seem to be stuck at 4.5%. The good doctor did not fret, as some others have, about the so-called interest rate "inversion," (although it was covered in his November forecast). Short-term interest rates should always be lower than long-term rates, because of the risk premium.

Interest rates are a poser. As Sohn points out, short-term rates are rising. Long-term rates ought to be rising, too. But they're not. Is this a good thing? Or does it indicate basic weakness? (Or maybe strength? There are many who see it this way. Imagine stable, low interest rates as far as the eye can see. It's a worthy goal, but this is not how you do it. I am reminded of Dow 36,000 and the "New Economy" of the late 1990s, an economy which had finally outrun recessions.)

Long-term rates should be rising not only to reflect short-term rates plus risk premium, but because mortgages and federal debt are stoking demand, while at the same time the weakness of the U.S. trade situation should be weakening the dollar.

The fact that long-term rates are not rising means to me that there is plenty of supply. Which means investors want safety over return. Not a good sign. Boomers are scared out of the stock market. Asian countries are flush with the booty of huge trade surpluses and are stashing dollars. Wealthy individuals have tax cuts they don't know what to do with. It certainly ain't coming from working families, since household debt has increased markedly since Bush got in, and net savings went negative for the first time in history according to a December report by EPI.

A creative alternative explanation is available at the Economist's View blog. (Please keep in mind when reading this stuff that inflation has been dormant since the early 1990s, and Greenspan gets the credit no matter what he does, raise the rate to 7% or lower it to zero. Please review my previous takes on Maestro Magoo, and discard the idea that the market has confidence in the Fed.)

(The Economist's View blog and this one would be useful to compare over a period of time. The author believes housing is poised to take off again. I do not.

An end to the bubble or no?

Predicting an end is not so difficult. The alternative is to forecast a boom that goes on forever, like the .... Well, I guess we haven't had one. If it's a bubble, it will burst. This is my opinion. When houses stop appreciating, things will not flatten out, as Dr. Sohn predicts. They will begin to descend, because the speculative motive will have disappeared. Dean Baker of the Center for Economic Policy Research has shown that house prices are already well outside their historic relationship with the rental market. It is by no means the case that houses are being bought exclusively by first-time homebuyer. Quite the contrary. Prices are often outside the range of this group, except with the off-the-wall mortgage instruments.

Dr. Sohn's view is that this is not a bubble, but a run-up in housing that will level off benignly. Thee are plenty of folks who present this view. I hope so. Though if you've made your money, you might want to get out of the market now, just to be safe. You could always put your gains in ... government bonds.

History Sez: Budget surpluses lead to program cuts

Experience contradicts a recent Yakima Herald Republic piece that began, "When the state Legislature convenes Monday, you can bet that $1.4 billion surplus is going to be burning a hole in its collective pocket -- despite promises from everyone from the governor on down to be 'prudent' .... Every special interest in the state will argue that its desire for more money and new programs will best serve the young/ old/ poor/ underprivileged/ needy/ disadvantaged/ most deserving." cite

Wrong.

In fact, both at the state and national levels, and with the enthusiastic support of the wingnuts at the Yakima paper, short-term budget surpluses have been turned into long-term program cuts. How? By cutting taxes irresponsibly. Tax cuts have swamped spending increases. Since taxes are simply the financing mechanism for public goods, when you cut taxes, you cut public goods.

(What used to be one of my favorite columnists, Peter Callaghan of the Tacoma News Tribune, pulled out the same stereotype in a column in mid-December, although I see he recently has attempted to finesse the issue, saying the legislature "and initiative writers" have historically "spent" surpluses in the form of tax cuts.

At the national level, the budget surplus passed on to the Republican power elite was transformed overnight into tremendous tax cuts. The cuts were portioned out as an early snack for working families followed by an unending series of banquets for the already wealthy. These tax cuts have been absorbed primarily by borrowing, that is, shifting the taxes plus interest to our future selves and after we die to our children.

The Radical Right has sold the notion that we can have the house, but paying the evil mortgage is optional. In order to maintain this myth, we are literally taking out more loans to make the monthly payment. When the day arrives that we need to pay both our current tax bills and that from these Bush giveaway years (plus interest), we will be facing some very tough choices.

Now these self-created budget deficits have offered Republicans an opportunity to grandstand, trumpeting as "fiscal responsible" cuts in social programs, student loans, Medicaid benefits, and child support enforcement (of course). These cuts are short-sighted and mean, and are driven only by ideological myopia. Rescinding the tax cuts for the rich is the fiscally responsible move.

Here in the state, we are all familiar with the Eyman initiatives which sold the voters "painless" tax cuts. They were painless only as long as a temporary surplus numbed our nerves. That anesthetic wore off quickly and we are still suffering. (Pity the cities and transit agencies whose tax base was lopped off. The state filled in its own holes with sin taxes, but has left local agencies to bite the bullet.)

The $1.4 billion surplus is an uptick in a downward trend. It needs to be allocated along the lines of Gregoire's supplemental budget proposal -- reserving the bulk of it against the shortfalls ahead. This can be an object lesson on the inadequacy of the state's revenue architecture. By following the governor's lead, the Dems can demonstrate which party is fiscally responsible in both Washingtons and make selling responsible tax reform much easier when the time comes.

Think long term, like two years

There is no meaningful surplus in the state's budget. The Governor's supplemental budget document confirms what we have been saying here. Those people who want to spend the $1.4 billion identified by the Forecast Council or dispense it in the form of tax cuts should set their pumps up somewhere else. This pond is a mirage.

Fully $900 million is set aside in reserve accounts and pension hedges, and rightly so. Much of the rest ($281 million) goes to cover caseload and classroom increases (in DSHS, Corrections, K-12 enrollment, teacher's salaries) that are required, mostly, to serve populations drawn to the state by its "strong economy."

Washington does have strength in its economy with Microsoft and Boeing, high-tech, agriculture and trade, but these sources are not what is floating job growth nor the up-tick in Olympia's revenue. The source of those has been the housing boom, or bubble. I can't put my finger on it right now, but I read somewhere that half of new jobs in the state since 2000 have come in residential construction and services from mortgage lending to landscaping. State revenues benefit from the boom by way of retail sales, home sales, construction labor (which is subject to sales tax), and the added property value represented by new homes.

Once the boom is over, the hangover begins. The equity people have routinely taken out of their homes to pay their credit cards off disappears, along with its attendant spending, because house values will no longer be appreciating. Residential construction dries up, and with them the special sources of revenue strength to the state. And we are stuck economically.

Today's revenue architecture is archaic and inadequate in Washington, a rattletrap of pre-war vintage. It is looking at handling $2.9 billion in new costs over the next biennium, according to preliminary estimates cited in the supplemental. These costs will suck up the Guv's $900 million in reserves and come looking for more. There won't be more. There will be less.

Not only can we not cut taxes, we are going to have to add capacity. Because of the scale of new revenue needed and the fact that current sources are maxed out, this means we are going to have to remodel the system. It is no longer a question mainly of regressivity and fairness, it is now also a question of basic adequacy. Both can be addressed in the same reform.

The 2007-09 legislature may be the place. Democrats may expand their majority, and it would be a good use of political capital to get Washington's fiscal ship seaworthy for what may be some difficult economic times ahead.

Nationally, the Bush economic blunder machine is cutting the roots of economic stability and spending the retirement and college funds on new toys for the rich and war games in Iraq. ("Games" is not to denigrate the immense cost in human lives and the devastation to America's standing in the world. It is to characterize the attitude of the Administration.)

My reading of the Gregoire budget indicates an appropriately conservative approach. The few new proposals are not inordinately expensive, being limited to: $38 million to help high schoolers pass the WASL, $42 million to begin Puget Sound clean-up, a $17.7 million biodeisel development project, $46 million to maintain WorkFirst against federal cuts, and $23.6 million to help schools, state agencies and low-income families with expected spikes in energy bills. Publicized initiatives like the tsunami warning system improvements, medical and crop research, construction at the Veteran's Home and perks to the aircraft industry are either very modest financially or off budget.

If Chris Greqoire and others can defend their fiscal caution in colorful terms that highlight both the economic uncertainties and the need for a workable tax system, then it may set up the inevitable debate and decisions ahead.

Leadership has arrived.

Chris Gregoire is a much better governor than the last one we had. Her new budget is responsible, forward-looking, and on point. There has been some whining in the press about the general absence of strong leadership among Democrats. They aren't talking about this state's governor.

I haven't gone through the whole budget document yet, but it looks to me like she's picking up where she left off last session. If politics is the art of the possible, she's a great politician, because she got everything possible out of that legislature. She took revenue where it was politically feasible and funded the class size and teacher COLA initiatives. That was the right thing to do, for the voters, for the teachers, for the kids, and to set up the next advances.

I don't want to say, "Shame on Gary Locke for not doing that," but I do want to say there is new strength and purpose now sitting in the Governor's mansion.

The new budget is responsible. Of an anticipated $1.4 billion surplus, almost $600 million goes into reserve accounts for pension, health care and education costs. Over $300 million goes to more and less restricted reserve accounts. An additional $38 plus million goes to help high schoolers graduate. The budget creates a cabinet-level Department of Early Learning. This, plus the attention to health care and the action on transportation from last session demonstrates she is sticking to the core missions of state government.

The "strong economy" which generated these numbers was tardy in arriving (three years into the "recovery") and is based on housing construction, which feeds the revenue stream pretty good. The governor's caution in spending the surplus is well-placed, because it may not happen, and if it does, it could well be followed by a large popping sound. (housing permits were up 18% in 2005. Next year, even the Forecast Council's optimistic forecast is for only a 2.5% rise. Pessimistic, a drop of nearly 15%.) Add to this the fact that the revenue architecture itself is structurally inadequate to the foreseeable demands, and caution is definitely called for.

The biodiesel project got a lot of ink, and it's a good concept economically. It substitutes Washington-made product for Alaska-made product. I understand it is not an environmental program, since the same greenhouse gases are produced, but it should be good economically for Eastern Washington. A better plan economically and environmentally would be to expand and develop rail capacity, substituting efficient infrastructure for oil.

Cleaning up Puget Sound. What a concept. This is a leadership move, mobilizing pride and conscience to do what citizens know is right. Gregoire seems to have her ducks in a row on the plan. It's something that could generate a culture of environmental responsibility. Inspiring.

Comment: This is government cleaning up after private property owners and commercial enterprises. If the market were working right, the costs of this clean-up would have been generated by the actors who caused the problem, but the market doesn't work so good that way. The market transactions are long over with, the cash is in someone else's hand, and the government has to come along and pick up the tab. Who do you think whines most about taxes? Business and property owners.

A similar situation exists on a much larger scale with the burning of fossil fuels. Climate change and pollution mitigation costs will be enormous. But the transaction includes nothing for that. The price of a gallon of gas pays Exxon for the extraction, refining and distribution and pays the government for building roads. The easily anticipated and tremendous environmental costs completely escape the market transaction. If they were included, gas would be as expensive as it is in Europe, but the market would function. Otherwise we are simply subsidizing destructive activities.

I'm not sure about the Life Sciences Discovery Fund. It sounds a little like picking winners and losers. I haven't read the details, but the more it benefits existing state-operated research and facilities and the less it gives tax breaks to the sexy industry du jour, the more I will like it.

Real Tax Reform

Washington's B&O tax is so bad that lawmakers won't touch it for fear it will fall apart completely.

The Business & Occupation Tax is a gross sales tax, meaning it is charged on the full value of every transaction, regardless of anything. Regardless of cost, so the effective tax on income is different for every business. Regardless of how many times the product has already been taxed, so this pyramiding overtaxes in-state companies and undertaxes out-of-state and large, vertically integrated companies. Regardless of investment or market position, so new and developing and investing companies are penalized, as well as small, homegrown companies. Just the thing for economic development, don't you think?

The first recommendation in the 2002 Washington State Tax Structure Study (Gates Commission) was to scrap the B&O entirely and replace it with a subtraction method value added tax. This recommendation preceded the much-ballyhooed call for a personal income tax. The Washington State League of Women Voters' State Tax Reform Update calls for a switch from gross sales to net sales. Both are designed to eliminate the pain and economic problems of taxing gross sales.

This can be done. It can be done in the context of reforming the B&O. It can be done and result in a relatively painless net increase in revenue of perhaps $1 billion per year. It can be done without major new bureaucracy. It can be done in a way that could eliminate the current special tax exemptions, or at least the rationale for them.

A full and detailed outline of just such a plan, developed by yours truly and Don Hopps, of the Institute for Washington's Future, is available online at the Effective Fiscal Policy Project. I wish I could tell you it was a work of genius, but it is really just the shortest distance between two points. The reason it hasn't been picked up in Olympia has more to do, I think, as much with the radioactive nature of the word "tax" as anything.

The B&O is a business tax. This reform makes it a rational business tax. As a business tax, it ought not to be as vulnerable to attack from the Eyman vigilantes. This would make the weakest link in Washington's tax structure into the strongest. It would be pro-competitive for Washington-based businesses. It would raise revenue largely by closing down the advantages now enjoyed by out-of-state suppliers and vertically integrated megaretailers like WalMart. And believe it or not, it is simple, as simple as significant tax reform can be. We simply subtract purchases from other tax-paying businesses from the current gross sales base. The six different rates of the current tax become one. The tax becomes rational. We don't even have to change the name.

Progressive Candidate Alert! This plan is good for small business. The current form includes a $100,000 standard deduction that would drop most small businesses from the tax rolls. Being independent would no longer mean having a higher effective tax rate.

Currently small business groups seem to be captive to the anti-tax conservative right that really serve larger businesses. Under this proposal tax incentives would be available for beneficial activities, not to the actors who are able to marshal political backing in Olympia.

Sports economics, a lesson in getting jobbed.

As much as I like sports, we have to stop getting mugged by these guys. The latest is the Sonics want a $20 to $200 million upgrade to Key Arena or they're going to have to take offers from other cities.

What's wrong with this picture? Sporting events are not public goods; and it's not right to support them with tax money. I don't care how many times we've done it. In Washington we already support our millionaire ballplayers in a very real way by not having an income tax. This puts us in the company of Florida and Texas among states with major sports. Since half the games are at home, that's a 3% to 6% advantage for our players. Don't think they aren't aware.

Plus, every new arena or upgrade is focused on fancy new luxury boxes, leased by companies who write off the pleasure on their taxes. The average fan can't even afford the parking, let alone a ticket. And don't talk about a beer and a hotdog. The media rights, the team apparel, through the roof.

But the "economic benefit" to the neighborhood of the venue must be worth the whole thing. Right? Well, No. That benefit is made of mist and it dries up under even the faintest light. Those restaurants in the area and the private parking lots may well get a bump, but it is borrowed from other areas where fans would have spent their money in the absence of the franchise.

A public good has two attributes, to a greater or lesser degree, that make it appropriate for tax financing. First, it is not depletable, and second, it is not excludable. A road, for example, is a public good. It is as good for the 100th car as for the first. Not depletable. A road is difficult to keep people from using. Not excludable. Not being depletable means the public good is often much more valuable than private goods. A golden goose. Not being excludable means you have to have different financing than pay-for-use, and the honor system doesn't work. Hence taxes, payments which are compulsory not because the good is worthless, but because if they weren't compulsory many people would not pay. The free rider, is the technical term.

An arena is most definitely excludable, and all the more so for the luxury boxes. It is also depletable on a per-show basis; a limited number of tickets can be sold.

So why are franchises so adept at getting public funding, even in the face of the hundreds of millions in salaries paid out each year for ballplayers? When an NBA player signs up for his multi-millions, he has the answer. "It's a business."

It is a business. A monopoly business. Franchise owners and players are busy splitting the take in one of the most egregious monopoly businesses in America.

We could analyze it at more length, but I hope there's no disputing it's a monopoly. Without a significant "market imperfection," you couldn't get $10 million a year to play a kids' game. If you aren't in the NBA, your pro team is nowhere. There is no alternative. Owners like it that way. It means their investments are no-lose situations. Don't listen to their whining about player salaries. Even a losing franchise can make back the investment, the entire loss in player salaries, and put a bunch in the pocket of the owner besides. Just sell it to the next city. It's value only goes up.

The problems for politicians in dealing with this issue are not small. The first one is basic ignorance. But that is only the first. Sports teams are owned by influential and monied people. The teams have an immense and easily manipulated fan base who will attack unwary politicians. I'm hopeful one or another of our leaders will take this opportunity of the Sonics to raise awareness. (I personally am not sure Howard Shultz, the majority owner of the Sonics and head of Starbucks, really wants the publicity of moving the franchise, but the initial noise is in the opposite direction.) The solution is not to get rid of the sports. We just need to regulate it like the monopoly it is. At its root it is a national problem.

Twenty million dollars -- the low end of the Sonics' plans -- would be a huge subsidy to home grown civic and cultural groups. Yet look at the public reception for a package of King County Council subsidies to local orchestras and community centers. It was only $3.5 million, and "cool" would be an understatement of its reception.

There is no end to the appetite of this particular beast, partly because of the power of sports in the national psyche and partly because the reward for winning it all is so enormous. (Make no mistake, there is fierce competition. Otherwise sane and sober human beings would not demand this sacrifice from a society which needs other, truly public goods much more desperately.)

It's only a game. We have to walk by homeless beggars to get inside. Pro sports were better when money wasn't the key to winning. Us real people are losing when we subsidize it because of its monopoly leverage.

Will legislators spend the surplus on Christmas?

November's revenue forecast put an additional $304.9 million in the state's bank account, and the op-ed page is abuzz with talk of profligate legislators who are certain to spend the bonanza like drunken sailors.

No. They won't.

Reason One: There is no bonanza. As the chief forecaster correctly points out, the economy's strength is in the housing market. With mortgage rates beginning to rise, homebuyers have accelerated their purchases. When – not if – the housing market cools, it will hit state revenue immediately. (Note: This is not from any effect on property taxes, but from effects on sales and B&O of reduced construction activity.)
Reason Two: They need to cover the accounting gimmicks they've used to balance the budgets over the past four years. Pension accounts need filling, in particular.

Reason Three: The state is in a long-term hole. Every legislator has seen the OFM chart showing tax revenues rising at 90% of personal income. The revenue base has been corroded by anti-tax initiatives at the same time that budget drivers, particularly health care costs, mean demands will grow faster than personal income. The gap is there. It's growing. The state needs every penny.

Reason Four: These are Democrats. The evisceration of the motor vehicle excise tax was facilitated by Democrat Gary Locke after I-695 had been thrown out by the courts. That was a big mistake, but a rare one. And this is a different governor. Chris Gregoire may not have the financial expertise of her predecessor, but she has the guts to do the right thing. And that right thing is much more obvious now than it was in the fat days of the late 1990s.

Gregoire's response to the revenue projection shows she is aware. Here, in particular, from the official release:

The Governor said she wants to save a substantial portion of the new revenue to help state government cover an expected shortfall in the next, two-year budget beginning in July 2007. She also is concerned that the national economy may weaken due to continuing high fuel prices and possible cooling of an overheated housing market, among other forces.

"I'll make budget decisions that set aside the dollars we will need tomorrow, while still taking care of real needs we have today," she said.

Victor Moore, Governor Christine Gregoire's budget director, said he was pleased that Washington's economy continues to improve. But he also noted that rising health care costs and pension obligations for the coming biennium mean that money must be set aside to avoid future tax increases.

Lastly, everyone congratulates Washington's economy on its strength. Let us note, please, that Republican predictions notwithstanding, the tax increases of the last session did not lead to economic weakness. Quite the opposite.

Thursday, December 08, 2005

Tax Reform in Tacoma?

The city services assessment scheme proposed by Tacoma's first-year city manager will go to a citizens advisory panel in the next few weeks. Is it reform? Does it offer any hope for other Washington cities squeezed by the anti-tax dynamics of the past decade?

Outline of the Plan: The proposal put forward by city manager Eric Anderson would cut regular property taxes for all by eliminating the city's portion of the regular levy. It would eliminate utility taxes for all, as well as taxes on businesses, the city's B&O and gross revenue tax. In their place would be a probably bimonthly assessment, a tax based on property values, dedicated to the core city services of police, fire and libraries. Under Anderson's preferred option, the assessment would apply to all property owners other than houses of worship. A biannual referendum would set the level of the assessment. The remaining non-utility city operations would be financed by the existing local option sales tax, which would be retained.

Advantages: To many, the chief advantage would be the initial cut in effective taxes if the shift of some of the burden to nonprofits goes through. Utility bills would be smaller. Regular semi-annual tax bills would be 25% smaller, reflecting the shift of the city's portion. The new assessment would likely come every other month, staggered with the combined utilities bill.

If the nonprofits were left out of the tax base, average tax burdens would stay the same, but it might still be preferred by Tacomans. The new assessment would make a structure that is slightly less "lumpy," since it would reduce the regular property tax bill. Voters tend to prefer taxes that are not "lumpy." They prefer sales taxes to income taxes partly on this count. The bill is small and frequent, rather than large and infrequent.

To Anderson, the chief advantage is clarity. Citizens can support the city's services or not, in a simple vote. He doesn't have to be the bad guy. His reduction of 41 positions in the current budget was not as painless as it has been portrayed.

One advantage to getting the hidden taxes off the books is administrative simplicity, both for businesses and government. Another benefit may be in avoiding difficulties should some telecommunications sources be legislated away in the US Congress, as has been threatened recently.

Improvements in clarity and simplification may be modest reforms. There may also be some improvements in progressiveness, since property values relate generally to income and wealth.

The greater reform could be to adequacy. When people see directly the public good they are financing, they tend to step up to the plate. Andrew of NPI did research some time ago showing that, statewide, 75% of local levies passed, for parks, schools, libraries, fire and so on. Anti-tax deadbeats have a more difficult time distorting the situation in local elections. Their bureaucratic bogeymen and voodoo black holes play better in statewide elections where the direct public good is not explicit.

If that pattern of success for local levies continued, it would be good news. It has to be the calculus Anderson is contemplating. The city's revenue architecture has been crippled by anti-tax initiatives, and it cannot support projected demand for services past the next biennium. Over ten years the shortfall grows to $100 million. Police, fire and libraries comprise two-thirds to three-quarters of all tax supported services.
But it is a vote. And the prospect for failure could well increase should economic times get harder. Note, the referendum would be on increases from a base level carried forward from the previous vote.

Is the city council be abdicating its function as a representative body by putting basic city budgeting to a vote? Anderson believes it is "too late" for government representatives to get control of revenues. The sequence of anti-tax initiatives which occasioned the current contortions, he thinks, also removed effective control.

It is true that Tim Eyman and his anti-government fellow travellers in the Republican party have intentionally eroded confidence in representative government as a campaign tactic. This is very unfortunate. The complex issues facing our society need to be decided by careful study and deliberation at each level, not by knee-jerk reactions to hot button campaigns.

Making the citizens face a vote which is explicit can only help in getting the public's concept of government back closer to reality. Government is schools, police, libraries, parks, fire protection, roads, courts, and so on. It is not the caricature of bureaucrats and lazy clerks painted by the wingnuts.

Most councilmembers have been cautions in their support. One, Mike Lonergan, was adamant in his opposition. In his comments he made the case for representative government, but only in passing. He is much more alarmed by the prospect of taxing nonprofits. He is past head of the Tacoma Rescue Mission and current executive director of a private school.

Is taxing nonprofits regressive? This is not clear. One can envision opponents of the assessment wheeling nursing home residents into the council chambers. But prosperous hospitals and schools would reap a windfall should they not be included in the tax base, since their utility and business taxes would disappear. Nonprofits are receiving city services without paying full price now, a de facto subsidy by taxpayers.
The question may turn on the magnitude of net effect, the difference between current business and utility taxes and the contemplated property assessment. And remember, the entire scheme needs to be authorized by the state legislature. The precedent for taxing nonprofits currently lies only in special fire districts.

Personally, I am in favor of broadening the tax base as much as possible. While there are many nonprofits who might feel a pinch, there are plenty of others who are hiding from taxes in their nonprofit status. In any event, there ought to be ways to tweak the categories or assessment criteria to meet the worst situations.

For those who may worry that the loss of business taxes means the contribution of non-city residents will be diluted -- Don't. Commercial property values directly reflect their access to customers outside the city limits.

The specific effects will need to be sorted by the task force.

No other action on the fiscal plight of Washington's cities is in sight. Virtually all face the same grim future as Tacoma. Any public debate is better than none. This alone is a compelling argument for going forward with the process.

The last word needs to be, This is not about taxes. It is about responsibility. Funding city services cannot be a matter of good luck and accounting gimmicks. Tacoma is one place where they are doing more than sitting and wringing their hands. They are looking for answers. The rest of the state is watching.