Olympia Business Watch

Merry Christmas ... Happy New Year

It's Christmas Eve and I realized I'd forgotten to wish everyone a safe and happy holiday season. And to say that I'll be taking a blog break through the new year.

More on Paying for Paid Leave

From the Governor's visit with the Olympian's editorial board about her 2008 priorities, Brad Shannon reports this nugget regarding the paid family leave program:

She refuses to use general-fund money to pay for benefits under a paid-family-leave law set to go into operation in Washington in 2009. A task force has recommended general-fund money for the first four years, but Gregoire has agreed only to the set-up costs, thinking lawmakers backing the program had promised a payroll tax. "They need to figure this out," she said of legislators. "I'm a believer in the program, but I'm not going to use general-fund dollars."

This position, if it holds (and there is no reason to believe it will not), will complicate the legislative discussion somewhat.  The Task Force, as I mentioned yesterday, rejected the payroll tax -- especially the prospect of a new tax on virtually everyone during an election year. 

And there were other more substantive policy concerns with it.  Is it an unconstitutional income tax?  Would lower income people pay for what is essentially a middle class benefit?  Would all employees pay so that 1% of them could take this benefit?  Do employees have to pay in if they already have good paid leave benefits? How much would administrative costs rise in order to collect it?  And so on. 

The general fund idea, while begrudging and uncelebrated, at least was easy. 

Paying for Paid Family Leave

Responding, perhaps, to this eminently sensible editorial from the Tacoma News Tribune, Representative Steve Conway, D-Tacoma, and Senator Karen Keiser, D-Des Moines, submitted this op-ed defending the merits of the program, tossing in some pretty surprising assertions along the way.

Background:  The Joint Legislative Task Force set up to figure out this new labor mandate/social welfare benefit, faced with the practical, political, and economic difficulties of a new payroll tax, recommended paying for the set-up, administration, and benefits of the program out of the state's (now ephemeral) general fund surplus.  This plan received a bit of heat. 

Said the News Tribune: 

Using existing tax revenue is a bad idea for several reasons, primarily because the state cannot afford it. The state surplus — which dipped below $1.4 billion earlier this month because of a slowing housing market — has enough claims on its shrinking riches. And it won’t last forever. ...

Over the long run, making family leave a general-fund entitlement would open the door to the costly expansion of benefits. It is far easier for legislators to slip extra money to programs buried in the $30 billion general-fund budget than it would be to raise a tax on workers’ paychecks.

The Governor seems conflicted on the proposal, according to published reports.  The Olympian's Brad Shannon quotes her legislative director, Marty Brown, as saying "The governor is open to looking at the general fund on start-up costs, but as for benefits, she is not there yet."   Indeed, in her just-released 2008 supplemental budget proposal, Governor Gregoire proposed $6.2 million for the Employment Security Department to start setting up the program - and that's it.

Apparently attempting to build support for this (and more), the Conway/Keiser op-ed argues this is a wise investment.  But their case has some holes.  For instance, they claim:

We’re not the first state to recognize the importance of paid family leave. California, New York, New Jersey, Rhode Island and Hawaii utilize a payroll tax to pay for maternity or family leave benefits.

On the contrary, I would direct attention to this comparison (created by the Task Force's own research staff) which shows these other states, unlike Washington, all have long-standing state-run temporary disability insurance programs and they apply only to leave for the individual's own non-work-related disability.  Only California has expanded the use of that program to paid family leave.  And Washington's program, especially in its regulatory aspect, imposes much more on employers than California's version.  More:

Family leave insurance yields large returns: It lowers infant mortality, encourages breast-feeding (bolstering babies’ immune systems), and allows women time to recover from childbirth. It also improves productivity by reducing turnover and helping children become better learners – both essential to economic growth.

It would be interesting to see empirical data that would document these assertions.  This "insurance" being a relatively novel thing, however, it seems unlikely there is much data that would suggest its availability or use has a measurable effect on these sorts of indicators.  On the contrary, those countries with the most liberal leave policies tend to have higher unemployment and meager economic growth.  And:

Our state’s paramount duty is to provide for the education of all of Washington’s children. Family leave insurance assures that all our children benefit from the care of their first and best teachers – their parents.

This rhetorical flourish again proves the improbable durability of our state constitution's "paramount duty" clause!

A lot is murky with the funding and administration of this program but one thing is clear: it will be an interesting 2008 session. 

News of the Not Funny

"Novelty" hand grenade sent in the mail to Justice Richard Sanders at the Washington Supreme Court.  Of course Justice Sanders, the court's redoubtable "great dissenter" (and in whose chambers this writer was once a law clerk) is well-known for choice grenades lobbed at improvident majority opinions.  He'd probably enjoy the token, as inappropriate as it was to mail to a public courthouse. 

Largely Vanilla Supplemental Budget Released

Yesterday, Gov. Chris Gregoire released her 2008 Supplemental Budget, the second year tweak to the biennial budget. She explains it in this press release. Interestingly, she leads with what she does not spend.

Gov. Chris Gregoire today unveiled her 2008 supplemental budget, which saves $1.2 billion dollars for the future and invests in programs to improve the safety of Washingtonians.

“The investments we made in the 2007–09 biennial budget took great strides in addressing many of our state’s most pressing concerns,” Gov. Gregoire said. “We started the transformation of our education system, we committed to creating a strong economy with targeted state investments and we helped ensure that Washingtonians stay healthy, especially our children, with greater access to high-quality, affordable health care.

Brad Shannon reports on the supplemental in the Olympian. Reactions fall along predictable lines.

Top Democratic budget writers said Gregoire offered a good first draft of the budget they will hash out during their 60-day session that starts Jan. 14. But Republicans said it sets the state up for future deficits — a frequent theme the minority party has voiced since Gregoire took office in January 2005.

Budget projections show a deficit in the future, an issue AWB has followed closely, frequently warning last session that the biennial spending plan was unsustainable. Jason Mercier runs down the numbers on the Washington Policy Center blog and includes the state budget office's projections.

Sen. Joe Zarelli offers the Republican perspective. The Budget and Policy Center thinks the state has a revenue problem.

Huckabee on Health Care

With the meteoric rise of former Arkansas Gov. Mike Huckabee in the pre-Iowa caucus/New Hampshire primary polls of the 2008 GOP presidential nomination fight, it was inevitable that we'd start hearing his ideas on health care.  Huckabee, who admirably lost 110 pounds after a diagnosis of diabetes, wrote a book called Quit Digging Your Grave With a Knife and Fork, and supports a national smoking ban, provided surprisingly little indication of what he'd do regarding health care until recently - despite his well known public advocacy for healthy living. Even now, Huckabee gives more of a general outline of a health care policy than a detailed plan. Of Huckabee's health care ideas, Bob Laszewski says:

On the surface [Huckabee] seems to want a lot of it both ways--no more government but lots of new program ideas. For example, he calls for tax credits to help low-income people purchase health insurance but says universal healh care can't be "funded through ever higher taxes." Giving low income people meaningful assistance to buy health insurance is what makes the Democrats' plans so costly.

Much of what he talks about in these principles is similar to the other leading Republican candidates. Like other Republicans, he would begin to shift the health insurance system away from the employer and toward a consumer-driven model putting a more vibrant health care market at the center of his strategy.

Like other Republicans, he does not call for individual or employer mandates and the more than $100 billion of annual spending that Democrats call for, in great part, to implement them.

Like all candidates, Republican and Democratic, he calls for more focus on prevention and health information technology to improve the cost and quality of the system.

Quoting Huckabee:

The health care system in this country is irrevocably broken, in part because it is only a "health care" system, not a "health" system.

We don't need universal health care mandated by federal edict.

We do need to get serious about preventive health care.

I advocate policies that will encourage the private sector to seek innovative ways to bring down costs.

I value the states' role as laboratories for new market-based approaches.

When I'm President, Americans will have more control of their health care options, not less.

As President, I will work with the private sector, Congress, health care providers, and other concerned parties to lead a complete overhaul of our health care system.

Our health care system is making our businesses non-competitive in the global economy. It is time to recognize that jobs don't need health care, people do, and move from employer-based to consumer-based health care.

On its face, this doesn't sound bad from a business standpoint although it would be nice to have considerably more detail. Unfortunately, some of Huckabee's nanny-state tendencies, like his smoking ban advocacy are, to say the least, unsettling.

How will it all play in Des Moines, Davenport and Dubuque? Soon we'll know.

AWBTV: Emergency Management

AWB vice president Dick Walter sits down with Maj. Gen. Timothy Lowenberg, Washington state adjutant general. They discuss the state's response to the recent storms and flooding devastating southwest Washington. Plus, they outline ways businesses can contribute to the relief effort and AWB's new partnership with the state Emergency Management Division to assist and better prepare businesses for future disasters. For more AWB videos, check out our Youtube page at: http://www.youtube.com/AWBorg For more information on how to prepare your business for a disaster, check out the Washington state Emergency Management Division webpage at: www.emd.wa.gov

Taxes and the Business Climate, Again

Yesterday's Wall Street Journal carried a commentary by economists Arthur Laffer (he of the curve) and WSJ editorial board member Stephen Moore. (Hat tip: Jason Mercier. Jason's comments are here.) They take a look at domestic migration, why folks move from one place to another.

Here's the crux:

Migration patterns ... reveal which states have the most dynamic and desirable economies, and which are "has-been" states. The winners in this contest for the most valuable resource on the globe -- human capital -- are generally the states with the lowest tax, spending and regulatory burdens. The biggest losers are almost all congregated in the Northeast and Midwest. Liberals contend that tax rates, regulations, forced union laws and runaway government spending don't matter when it comes to creating jobs, high incomes and a higher quality of life. People tell us otherwise by voting with their feet.

Their commentary is based on their study for the American Legislative Exchange Council. I tend to agree that taxes and regulation matter. In this Washington Business column, I write about how they affect business location, drawing on some excellent research done for Kansas Inc.

The KI research uses a variety of statistical techniques to analyze how well the various business climax indexes explained economic growth from the 1970s through 2002. A good index would be one that properly weights those factors that influence business success, measured by employment and wage growth. Most fall short. What makes a dynamic, competitive economy is simply too complex to capture in a quick and dirty ranking.

In the end, after all the sophisticated data analysis, the KI study concludes: "The most important elements of business climate appear to be tax and regulatory burdens imposed on firms." In other words, the bottom line is still the bottom line.

But as we've noted before, there are a lot of variables, and different business climate studies weight things differently. While everyone looks for shorthand ways to assess the reasons business locate or expand where they do, the decisions are often more complicated than that.

Where you locate depends to a large extent on what you do. Cheap land and energy matter more to manufacturers than they do to biotech firms. Good transportation infrastructure matters relatively more to some industries than others, although increasingly it matters to everyone. In addition to lower taxes and regulations (including right-to-work laws), the southeastern states have more land availability, low energy costs (TVA states in particular), a decent labor supply, lower housing costs, and – at least where I’ve been – good roads and highways.

Costs matter a great deal, but typically come into play in choosing among several otherwise acceptable sites. That is, after a number of locations have been selected that fit the top tier criteria (land, labor, access to markets and suppliers) costs - taxes and regulation - will generally make the difference. That's true whether the choice is made within the region (Portland-Vancouver or Spokane-Coeur d'Alene) or between regions that match up well on other criteria (e.g., Seattle-Minneapolis, Seattle-Dublin).

The ALEC study is worth putting up there along with all the others. But, as with all the others, the authors' policy preferences help determine the outcome.

 

Economy Slowing

No question mark required.The economic slowdown that contributed to a reduction in the November revenue forecast continues to concern the state's top economic forecaster. The Tri-Cities Herald reports the ChangMook Sohn expects the growth rate to slow to 2 percent a year.

"The last three years we've seen a 3 percent increase in employment each year, which is very strong growth," Chang Mook Sohn, director of the Washington Economic and Revenue Forecast Council, said at Washington State University's School of Economic Sciences Conference on Economic Issues and Outlook.

"We don't expect to see that same type of growth in 2008 and 2009," he said. "We expect it to be less than 2 percent each year."

As we've noted before, the state tax structure - heavily reliant on consumption, construction and real estate taxes - makes it particularly sensitive to the current economic sluggishness. Even without sliding into recession, state revenues could take a major hit if the slowdown continues.

Sohn said there were 186,000 new homes built in Washington in the past three years and a population increase of only 330,000, leaving the state's real estate market overbuilt by about 50,000 homes.

Sohn said he hasn't seen that large of a disparity between new homes and the population increase before.

Meanwhile, consumer retail spending is slowing as well.

Sohn said during the past 16 quarters, consumer spending steadily has outpaced personal income growth. But now, that trend has also slowed. ...

And when consumers spend less, fewer sales tax dollars trickle into the state coffers. 

The governor's supplemental budget proposal is due in the next few weeks. The next official revenue forecast comes in February.

Fiscal Survey of the States Shows Leaner Times

The National Association of State Budget Officers and the National Governors Association released their annual Fiscal Survey of the States today. While I haven't read the report yet, Pamela Prah of Stateline.org apparently has.

Most states will muddle through the current economic slow down, but if the country dips into a recession, then even more than 20 states likely will have to make cuts to their current budgets, Raymond C. Scheppach, executive director of the National Governors Association predicted. "Clearly, it’s a little more gloomy than it was once was," Scheppach said as NGA and the National Association of State Budget Officers released the latest state revenue numbers.

 

The stalled housing market is pinching states across the board, but it’s more severe for states such as Arizona, California, Nevada and Florida that rely heavily on real estate taxes, Scheppach said.

Housing and construction have bolstered revenue collections here. This chart from the state forecast council further suggests we may be sharing in the national construction decline.