Source: Washington State Economic and Revenue Forecast Council

If there was any surprise at last week's anemic state revenue forecast, there was absolutely none at the immediate response. The Seattle Times jumped on the additional $778 million budget shortfall as an opportunity to demand "more union concessions," while Republican lawmakers, reflexively sticking to their "Thou Shalt Not Raise Taxes" commandment, issued renewed calls for Olympia to "live within its means." Even Democratic governor Chris Gregoire echoed the Republican meme, muttering something about the need to "streamline government" and "enact new efficiencies" while repeating her own "no new taxes" pledge.

The conventional wisdom was summed up by state senate GOP budget negotiator Joe Zarelli, who told the Associated Press: "The projected deficit isn't due to a lack of revenue, it's the result of an overabundance of spending commitments."

Yeah. Uh-huh. Except, um... he's wrong.

For all the talk of profligate spending and government waste, Zarelli has it exactly backward. It isn't the spending side of the equation that's knocked our state budget out of whack, but the other way around. State government has been steadily shrinking over most of the past 15 years, and dramatically so during the past several.

In fact, what Washington has is a structural revenue deficit that no amount of downsizing, streamlining, or resetting can fix. Not even an economic recovery can reverse this trend.

As the chart above clearly illustrates, state general fund revenues as a share of the overall state economy have been steadily shrinking for the past decade and a half, falling from 6.9 percent of personal income in 1995 all the way down to 4.7 percent today, according to the Washington State Economic and Revenue Forecast Council. That means the typical Washington household's state tax "burden" has shrunk by an average of 30 percent.

As the anti-taxers gleefully point out, both state spending and full-time employees grew during much of this period. But they refuse to accept the fact that spending didn't grow nearly as fast as the overall economy, the measure that most closely tracks growth in demand for government services and investment. In other words, the state's relative ability to provide basic services has slowly diminished. Then, as our nation plunged into recession, so did consumer spending, and that's when the shit really hit the fan.

Between 2008 and 2010, general fund revenue collapsed from $15.7 billion to $13.6 billion, resulting in massive layoffs and spending cutbacks. But even during the worst of the recession, both our economy and our population continued to grow, accelerating a decade-long trend of declining per capita revenues, which plummeted from $2,217 in 2006 to $1,827 in 2010. What for years had been a gradual decline in the state's ability to meet the needs of its citizens has now become a full-scale retreat.

"This is a revenue crisis, pure and simple," says Washington State Budget & Policy Center executive director Remy Trupin. "Washingtonians have stopped spending money—thereby reducing tax revenue—due to the meltdown on Wall Street that led to the Great Recession. To suggest otherwise is to literally blame the victim."

Even a robust economic recovery won't turn things around if the long-term structural problems persist. According to the latest state Department of Revenue data, Washington relies on the sales tax for over 52 percent of general fund revenues—more than nearly any other state—a tax that has been shrinking as a percentage of the economy for at least the past half-century. For example: In 1959, the sale of goods and services subject to Washington's tax accounted for 32 percent of total consumer spending. By 2000, this number had dropped to less than 26 percent. For decades, state lawmakers responded by periodically raising the sales tax rate. But the last such hike was back in 1983.

Meanwhile, lawmakers have rewarded businesses by passing over $1.6 billion a year in new tax breaks since 1995 alone, only further exacerbating Washington's long-term structural revenue deficit.

Legislators and opinion makers who warn that we must learn to "live within our means" are absolutely right, but the question is—with education, health care, and other basic services teetering on the edge of collapse—what exactly does "means" mean? Should our "means" be defined by the shrinking revenues of an antiquated tax structure or by the strength of our economy as a whole? recommended

See companion article: The Solution: Close Tax Loopholes