Fiscal Fallout: WA four-year revenue forecast drops almost $900 million

(The Center Square) – In June, the Washington State Economic and Revenue Forecast Council’s revenue forecast anticipated that state coffers would run dry by 2027 despite record revenue levels and following the largest tax increase in state history.

Now, ERFC’s updated revenue forecast anticipates the state will have almost $900 million less coming in than before over the next four years, which is being attributed in part to national policies such as Federal Reserve interest rates and President Donald Trump’s tariff policies, but also a decline in residential construction.

According to the updated forecast, the state will now bring in $412 million less for the 2025-27 biennium, and $477 million less for the 2027-29 biennium. Additionally, the state is also facing a potential $1 billion in tort claim liability through the next four years.

ERFC member Rep. Travis Couture, R-Allyn, asked colleagues during Tuesday' meeting whether it was time for Gov. Bob Ferguson’s Office via the state Office of Financial Management “to look at freezing certain funds and trimming down on certain expenses as we head into the next session. It just seems like it would be prudent as we head into the next session that OFM and the Governor's Office are looking around at what they can do within their authority, much like Gov. [Jay] Inslee did at the end of last year.”

Office of Financial Management Director Katherine Chapman-See said that “this is something that we're digging into on a daily basis, trying to wrap our arms around how we move forward given the significant budget challenges ahead of us.”

She added that in June “we sent out budget instructions to agencies for the supplemental [budget] proposal. We asked them to identify places to make productions other savings and efficiencies, and to really, really focus on only the most critical and emergent needs. So, this is something we've been expecting, that we've been working diligently with agencies to try and encourage them to take steps to make.”

Washington’s fiscal issues first bubbled to the surface in late 2024 following the November election, when state officials warned of a multibillion-dollar budget shortfall over the next four years, driven by record spending levels. The state Legislature went on to pass a $9 billion tax increase during the 2025 legislative session, the largest in Washington’s history.

Nevertheless, at ERFC’s June meeting it was revealed that the state was still projected to run out of cash in 2027, with some state officials describing it as the “worst budget crisis we have ever had.”

“The U.S. and Washington economies continue to transition to slower growth,” ERFC Chief Economist Dave Reich told the council. “But important to note that our base case is still that the economy is going to continue to grow. I would say recession probabilities are elevated, but as of now, not our base case.”

While national imports fell during the second quarter of the current fiscal year, Reich said that new trade agreements made since June I think has settled nerves a little bit around the tariff issue.”

He added that “the sort of conventional wisdom is we're going to see higher prices or higher or higher inflation and lower real economic growth. And that continues to be the view. So far, we really haven't seen a lot of impact from the tariffs in terms of prices.”

Another factor that could alter the state’s economy and its revenue levels are Federal Reserve interest rates.

“When inflation was very high, back in 2022, the way to the Federal Reserve responded to that was to raise interest rates,” Reich said. “What that does is it makes it expensive for people to borrow money, either personally, for your own self or for your business. That was intentional to slow down the economy and get inflation under control. Inflation has come down, and interest rates have come down a little bit, but they're still elevated. The Federal Reserve is under pressure to lower interest rates more than an objective body would choose; that could lead to also to higher inflation.”

At the same time, Reich also noted that another contributor to the state’s revenue forecast decline is the decrease in residential housing permits, which are now down to 2013 levels.

“About 20% of our taxable sales are from construction,” he said. “So it's a significant part of our revenues, and part of the story why our revenue forecast is a little bit lower this this go around.”

“Our economy has slowed down a lot, and our revenues are growing something more consistent with what you'd expect from the economic growth that we're seeing, and recent policy changes continue to cloud the picture for revenue collections,” he added.