From NYBA lobbyist Jim Hedrick:

Washington State Faces $1.2 Billion Budget Shortfall Amid Slowing State Economy

In another sobering fiscal update, State Economist Dr. Dave Reich delivered his quarterly revenue forecast today to the Washington State Revenue and Economic Forecast Council, outlining a growing budget shortfall fueled by weakening economic conditions and rising national uncertainty. Despite stronger than expected tax collections since the last forecast in June, the state now faces a projected $1.2 billion revenue shortfall over the four-year budget outlook.

Reich announced that the state’s 2025–2027 revenue forecast has been revised downward by $412 million, bringing total expected revenue for the biennium to $74.3 billion. The subsequent 2027–2029 biennium forecast was also reduced by $477 million, on an estimated $79.5 billion revenue base. These revisions have immediate implications: when measured against the current two-year budget adopted by the Legislature earlier this year, Washington is now facing a shortfall of more than $400 million, one that grows substantially in the years ahead.

Although state sales and B&O tax receipts are outperforming forecasts, longer-term economic indicators are showing signs of risk. Reich explained that expectations for key economic drivers, including housing, construction, and personal income growth, have all weakened since June, prompting the downward revisions. “The uncertainty we’re seeing is not just local,” Reich said in his remarks. “There’s significant national volatility, much of it tied to federal trade and fiscal policy.” He pointed to rising tariffs, reduced federal health care spending, and a slowing labor market as signs that the broader economy may be entering a prolonged period of stagnation.

Nationally, the U.S. economy has slightly outperformed growth expectations, but at the cost of persistent inflation, which remains elevated. Though the Federal Reserve recently lowered interest rates, citing labor market softness, Reich cautioned that these efforts may be complicated by tariff driven price increases in the months and years ahead. “Inflation is very likely to pick up over the next few years as tariffs lead to price increases,” he warned.

Closer to home, Washington’s labor market is also showing signs of strain. Employment growth, once a reliable engine of the state’s prosperity, has slowed notably. Job growth for 2025 has now been revised down to 0.3% (from 0.5% in June), and 2026 growth is expected to be just 0.2%. Meanwhile, the state unemployment rate, currently forecast at 4.5%, is projected to rise to 4.9% by 2027 before declining again by the end of the decade.

One particularly concerning development is the performance of personal income in Washington, which for the first time in years is now expected to grow more slowly than the national average, a reversal from past trends. In addition, housing permits are forecast to decline in 2025, suggesting continued weakness in the construction sector.

The aerospace industry, a longtime cornerstone of the state’s economy, remains weak, though job losses appear to have stabilized. Reich noted that a modest recovery is expected through 2029.

This revenue forecast poses a major challenge for Governor Bob Ferguson, who is now preparing to release his first supplemental budget proposal this December. With a $1.2 billion shortfall looming and the state constitutionally required to balance its budget over a four-year horizon, Ferguson and the Legislature face tough choices.

While Ferguson’s Democratic Party holds sizable majorities in both legislative chambers, the politics of addressing such a gap, especially in an election year, are fraught. Whether through spending restraint, revenue increases, or a mix of both, the state’s leaders must now decide how to close the gap while maintaining critical services and investments.

The next official revenue forecast, scheduled for November 18, will set the stage for the Governor’s supplemental budget proposal, which must be released by mid-December under state law."