Higher-than-expected revenues, as reported to Washington state lawmakers on Tuesday morning, could help break the current budget impasse and lead to an agreement before the state government was scheduled to shut down on July 1.

Washington lawmakers learned on Tuesday morning the state can expect roughly $120 million more in revenue than earlier projections had anticipated while entitlement spending will drop by around $90 million over the 2013-15 biennium.

Combined with another $160 million in new revenue because of last week’s vote to restore Washington’s estate tax and a handful of other new revenue sources or savings, lawmakers have somewhere in the neighborhood of $2.8 billion with which they can bridge their differences and adopt a new two-year operating budget sooner rather than later.

“I do think this helps get us to a budget agreement sooner,” said Sen. Jim Hargrove (D-Hoquiam), a member of the Legislature’s Economic and Revenue Forecast Council. “I want to get it done, and the people of Washngton want us to get it done. It’s been a grueling session and we need to finish up and go home.”

“I think this should be enough to break the logjam,” agreed fellow Forecast Council member Sen. Andy Hill (R-Redmond). “By itself, it’s only a small part of the total $32 billion state budget. But at this point, we were only a few hundred million apart and I’m confident this will be enough to bridge the remaining gap.”

The extra $2.8 billion, he said, should enable the Legislature to add $1 billion in funding to K-12 education as required by the McCleary decision, preserve the state’s social safety net and maintain a rainy day fund — all without imposing any major tax increases on the majority of Washington residents.

The Washington State Legislature is currently in the second week of its third session of the year, having been unable to agree on a budget during the original 105-day regular session or a 30-day additional session that ended earlier this month. Because the Legislature is constitutionally required to adopt a budget by July 1, the state is looking at a government shutdown if a deal isn’t worked out in the next two weeks.

Tuesday’s report from the Economic and Revenue Forecast Council makes that less likely.

“I’ve always thought a shutdown wouldn’t be necessary,” said Council Chairman Rep. Ross Hunter (D-Medina). “But then, I thought we’d get it done in the regular session or the extra session, so my track record for predicting success isn’t good.”

The Economic and Revenue Forecast Council is required to revise its income projections four times a year. The agency delivered a preliminary report two weeks ago, but the new projections include several assumptions not available at that point.

“Most of the positive variance … came from earlier-than-expected payments in property, cigarette and public utility district taxes, which decreased forecast collections in those categories for the rest of the year,” said Steve Lerch, Washington State’s chief economist.

Lerch added that the March report anticipated a slowdown in the growth of Revenue Act taxes in the first quarter of 2013 due to expiration of the 2 percent payroll tax cut in January. In fact, those tax revenues came in at $54 million above the forecast.

“Consumers didn’t react as negatively to the payroll tax as we anticipated,” Lerch said.

Meanwhile, real estate taxes came in at $34 million higher than expected due to continued recovery in the commercial property market and stronger-than-expected growth in housing sales fueled by unprecedented low interest rates.

Lerch said state revenues are now higher than they were before the 2007 recession hit, but cautioned the recovery is still the slowest on record and could be undermined quickly by outside forces, including the European banking crisis, unrest in the Middle East and economic weakness among Washington’s Pacific Rim trading partners.

The Forecast Council’s final report can be viewed at http://www.erfc.wa.gov/forecast/documents/rev201618color.pdf.

An academic study released on Monday says environmental fears associated with the proposed construction of massive coal-exporting facilities in Bellingham and Longview are largely exaggerated while the economic impacts to industries all over the state have been underestimated.

Up to now, the debate over whether to build large-scale coal export facilities at a pair of Washington state ports has focused on the economic benefits associated with the construction and operation of the facilities versus the environmental cost of the projects in particular and the use of coal in general.

But an academic study released on Monday suggests any discussion that doesn’t include the collateral benefits to other Washington industries of creating more trade infrastructure are seriously flawed because they downplay the positive impacts the coal ports could have on Washington’s economy.

“These effects are likely to be substantial and fairly widespread throughout the state’s economy,” the report states. “As a result, economic impact studies of the two facilities underestimate their total economic impact benefits to Washington.

The study, commissioned by the Washington State Farm Bureau, argues that industries like agriculture will reap huge rewards not only from the construction of bulk commodity storage facilities, but though the “upstream” impacts of increased trade on the whole.

The report concludes that:

• coal shipments are likely to lower costs to other shippers by improving the economics of infrastructure investment and operation in Washington;
• more efficient import and export capabilities generate economic benefits for terminal customers, including agriculture, that have not been quantified to date; and
• existing economic studies likely underestimate the economic benefits from the terminals and understate how broadly those economic benefits may be dispersed.

“The prospect of freer trade between the United States and the fast-growing Asia-Pacific region provides Washington state with a unique opportunity to become economically wealthier by intensifying its longstanding competitive advantage as a gateway to trading partners between the United States and its Asian trading partners,” the report says. “Beyond the additional jobs and income associated with facilitating shipments of imports and exports, economic wealth in the state will be created by the expansion of domestic industries, particularly agriculture.”

Originally, up to six terminals in Washington and Oregon were considering expansion, but the list has currently been pared down to the Gateway Pacific project in Bellingham, which would handle as much as 53 million tons of coal annually, and the Millennium Bulk Terminals in Longview, which could ship up to 48.5 million tons.

A third port in Boardman, Ore., is still in play, but it would only handle 8.8 million tons.

Environmental activists have been outspoken in their opposition to the projects, arguing the state’s ecosystems would be adversely affected by adding infrastructure to transport coal to Pacific Northwest ports, as well as the increased burning of coal by utilities and other consumers in the developing markets of China and the Pacific Rim.

The study’s author, Stephen Globerman, a professor of international business at Western Washington University, concedes that environmental concerns should be a part of the discussion, but suggests the arguments be presented on a scientific basis rather than emotion and fear.

“Those without specialized expertise in the relevant environmental sciences have little to add to the debate,” he wrote.

“We believe strongly that the state’s existing process for evaluating infrastructure projects should remain unchanged,” added Farm Bureau CEO John Stuhlmiller. “The proposed commodity terminals will directly benefit some of our members, with the largest facilities handling wheat, grain and timber products in addition to coal. But all Washington exporters stand to benefit from new investments that make Washington a more reliable, efficient and competitive gateway for global trade.”

Sen. Mark Schoesler (R-Ritzville), himself a farmer, attended Monday’s media event and expressed hope the two projects would move forward rather than be buried under a wave of regulation and red tape.

“I’m very concerned with the impact the export debate may have on Washington’s business climate,” he said. “Broad and seemingly limitless reviews for new investments, as some have proposed, would be devastating to economic growth.”

The state of Washington narrowly averted the need to mail out up to $160 million in refund checks on Thursday when the state Senate just minutes before midnight passed an estate tax “fix” that could ultimately be declared unconstitutional.

The first round of checks, totaling $40 million, were due to be mailed at 8 a.m. on Friday. The House passed a similar bill on Thursday and Gov. Jay Inslee signed the bill moments after it cleared the Senate.

“We need this action now,” Sen. Sharon Nelson (D-Maury Island) told her colleagues as the late-night session neared an end. “It’s on the verge of being too late. In eight and a half hours, those checks go out to the wealthiest estates in Washington, funds that could be used for our kindergartners, our third graders and everything we believe in for our kids’ futures.”

Five members of the Senate’s Republican-led Majority Caucus voted with Democrats late Thursday night to close an estate tax “loophole” and impose the tax retroactively dating back as much as 30 years in some cases.

The bill is intended to close a loophole created in 2005 when the state Supreme Court invalidated the way Washington collected estate taxes, making it possible for married couples with estates in excess of $2 million to put assets into a trust account that wasn’t subject to the tax when one spouse died.

The funds could be taxed, however, when the surviving spouse died and tried to pass along the assets to children or other heirs.

The court said the arrangement was unfair because it treated married and single people differently. And from the Legislature’s point of view, it left on the table millions of dollars it had counted on collecting.

The money was earmarked for the state’s education trust fund and could be applied toward the millions in new education spending the Legislature was required to approve under last year’s McCleary ruling in the state Supreme Court.

Most Republicans opposed the bill — which passed by a 30-19 vote — but a handful did support it for pragmatic reasons.

“According to my calculations, we’ve got about $1.9 billion more in taxes coming in this biennium than we did in the last last biennium,” said Sen. Andy Hill (R-Redmond). “When you add in our hospital safety net, the cost shift for our Medicaid expansion and now this $160 million, we now have roughly $2.7 billion more than we had last biennium.

“And yet we have a budget that was pushed over here from the (House of Representatives) that could only put $700,000 into basic education,” he said. “And we have a governor saying we need to raise more taxes to put $1 billion into basic education. I hope we can pass this bill and that all the money goes into education, where it belongs.”

Opponents of the bill, however, say it goes to far by not only reinstating the death tax for married couples, but also making those taxes retroactive back to 2005 and even father.

“As an attorney, I just can’t support retroactivity,” said Sen. Sharon Brown (R-Kennewick). “The bill allows the Department of Revenue to tax transactions 30 years after the transfer was completed. This bill is an unconstitutional attempt to change the terms of a contract entered into prior to the enactment of Washington’s estate tax.”

“To some extent I look at this as a short-term loan with a very high interest rate,” said Sen. Michael Baumgartner (R-Spokane), “because I do expect that the state is going to lose this lawsuit and these folks are going to be getting these funds — plus interest and attorneys’ fees.”

The Washington State House of Representatives voted on Thursday to “fix” an estate tax loophole that had prevented the state from collecting millions in estate taxes since and allow it to go back and impose those taxes retroactively.

A day before the state was supposed to mail out $160 million in refund checks most lawmakers would prefer to spend elsewhere, the Washington State House of Representatives on Thursday approved an estate tax “fix” that keeps the money in Olympia until it can be diverted to the education trust fund.

The bill, Engrossed House Bill 2075, was sent immediately to the Senate, which is expected to act on it by this afternoon.

The legislation was prompted by a 2005 state Supreme Court ruling that invalidated a “pickup” tax that allowed Washington to collect a share of federal inheritance taxes levied on individual estates. When the law was struck down, married couples were temporarily able to transfer assets to a surviving spouse without incurring the tax by using what’s known as a Qualified Terminable Interest Property (QTIP) trust.

Single people wishing to transfer assets to their children or other heirs, however, didn’t have that same ability.

The State’s Department of Revenue says it has already received 70 refund requests totaling more than $40 million from estates that had paid the taxes prior to the court ruling. Others have gone to court to seek refunds.

The House previously passed a bill closing the marital trust exemption, and the Senate has offered a bill that does the same while also increasing the tax on the largest estates and creating an additional exemption for family owned businesses.

The bill passed on Thursday says the court ruling created “an inequity never intended by the Legislature,” and it would modify the definition of taxable estates to include the trusts.

In addition, it would apply the law retroactively to those who died on or after May 17, 2005.

“This is in no way a tax increase,” said Rep. Reuben Carlyle (D-Seattle), sponsor of the bill. “This simply returns us to the status quo that has existed for many, many years in Washington. It also helps us fund our constitutionally required spending increases for education.”

Rep. Jamie Pedersen (D-Seattle) said those who participated in the trusts expected they’d have to pay the tax eventually.

“These are people who made a very conscious decision to defer – but not avoid – these estate taxes,” he said. “Unless we make this change, we’ll be at a point where only single people need to pay estate taxes. We’re weighing the expectations of these families who always expected to pay the tax against the expectations of millions of Washington school children.”

Olympia Republican Rep. Gary Alexander said he didn’t like the bill but would be voting for it anyway.

“I believe we are going to have to get a budget out of this body,” he said, “and that’s going to require some give and take. If this helps get us to a resolved consensus without requiring new taxes, I think it’s something we ought to go forward with.”

The Legislature on Wednesday began its third session of the year, having failed to reach agreement on a two-year operating budget during the 105-day regular session that ended on April 28 or the 30-day special session that ended on Tuesday. If a deal isn’t worked out by July 1, it will force a shutdown of state government and its services.

Other GOP lawmakers were less understanding than Alexander, particularly with respect to the provision in the bill that would allow the state to retroactively impose estate taxes it hadn’t been collecting since 2005 or even longer.

“There’s a longstanding tradition in government that you don’t pass laws retroactively to make people pay something they never knew they’d have to pay,” said Rep. Matt Shea (R-West Spokane). “We’re going to be sued for this, and we’re going to lose. And it doesn’t need to happen. The answer is to fund education with our first dollar, not our last dubious penny.”

“We didn’t take the money lawfully,” added Rep. Maureen Walsh (R-Walla Walla). “This money belongs to the families that paid a tax the court said they didn’t have to pay.

“Maybe it’s raining,” she said. “Maybe we ought to just take $160 million from the Rainy Day Fund and take care of these people once and for all. If we don’t, they’ll file lawsuits and we’ll just have to keep coming back to this issue again and again.”

The bill passed by a vote of 53-33 in the House.

Vancouver Republican Sen. Don Benton on Wednesday fired back at Gov. Jay Inslee, who laid the blame for the current budget impasse at the feet of Senate Republicans, who insist on reforms in exchange for agreeing to tax increases.

Vancouver Republican Sen. Don Benton wasted little time responding to comments made on Tuesday by Gov. Jay Inslee blaming Senate Republicans for the current budget deadlock in the Washington State Legislature.

“It’s extremely unfortunate that we’ve been forced into a second special special session by the Democrats,” Benton said. “People say there’s enough blame to go round, but the fact of the matter is, we passed a budget in the first session that put $1 billion into education and didn’t raise taxes. We passed that same budget again this special session. The Democrats who control the House of Representatives could easily have passed that budget — they could easily have passed that budget three weeks ago and we wouldn’t have needed a special session at all.”

Washington State lawmakers on Wednesday morning opened a third legislative session. The regular 105-day session ended on April 28, forcing Inslee to order a second, 30-day session on May 13. That session concluded on Tuesday with no agreement in sight on a two-year operating budget, let alone a capital budget or transportation budget.

On Tuesday, Inslee, a Democrat, took the unusual step of pointing the finger of blame at one side, arguing that Democrats had offered “major, substantial and meaningful” compromises while the Republican-led Majority Caucus in the Senate refuse to budge from its demand that any new tax increases be tied to long-term government reforms.

In particular, Inslee accused Senate Republicans of holding the state’s school children hostage in hopes of advancing their political agenda. On Wednesday, Benton responded in an audio message on the Senate Republican Caucus website by applying the same description to Inslee.

“The fact is, we put in $1 billion for education and they put in far less and they’re holding out for tax increases,” he said. “If education is important — and I believe it is — we should fund it first and not hold it hostage to all the other programs that come begging for money down here.”

In the Senate version of the budget bill, education funding would be increased by roughly $1 billion with no increase in taxes, with much of the money coming from social programs. By contrast, the House version fully funds social programs but would only reach $1 billion in education spending if the Legislature approves tax increases.

“The Democrats who control the House have decided to once again hold our children’s education hostage in order to extract tax increases from the citizens,” Benton said. “Democrats continue to extort their citizens in order to provide an education. And what’s troubling to me is that it’s not necessary. It’s absolutely despicable.”

Benton noted the state is projected to generate around $2 billion more in revenue during the 2013-14 biennium than it did during the previous two years. That increase could be applied to education with the rest divvied up among a long list of other programs looking for funding increases, he said, and there still wouldn’t be a need for a tax hike.

Despite the gulf apparently separating the two sides, Benton said he still hopes a deal can be hammered out in just a few days of the current third session.

“I hope we’ll be able to wrap this up quickly,” he said, “that Democrats will come to their senses and pass the Majority Coalition budget. It’s essentially the same budget we passed in the first session and again in the second session — and we’ll pass it again in the third session if we have to.

“We are not capitulating to Gov. Inslee’s extortion attempts to raise taxes,” Benton said, “even though he promised he wouldn’t raise taxes when he ran for governor.”

Washington Gov. Jay Inslee on Tuesday blamed the current budget logjam on Senate Republicans, arguing that Democrats in the House had already compromised enough.

With the special session down to its final hours and both houses of the Washington State Legislature still deadlocked over a two-year operating budget, Gov. Jay Inslee on Tuesday announced a third session would convene at 9 a.m. tomorrow and laid the blame for that action squarely at the feet of the Republican-led Majority Caucus in the Senate.

“Simply put, the House has made major, substantial and meaningful compromises in its budget,” he said during a media availability session in Olympia. “The other side has not. One side is insisting on ideological policy issues and the other is not.”

Absent a budget agreement by July 1, major portions of the Washington state government ail be forced to shut down, and Inslee said his cabinet would also be meeting on Wednesday morning to plan for that contingency.

“My vision will not be clouded by ideology,” he said. “And I hope the Senate Majority will agree to compromise. But I will also plan responsibly in case that doesn’t happen.”

Inslee, a Democrat, praised the Democrat-led House of Representatives for backing away from several key policy issues it sought during the session, including the Reproductive Parity Act, which would essentially require all employer-provided health insurance plans to offer abortion services, and the DREAM Act, which would give illegal aliens who meet certain criteria access to tuition assistance.

Meanwhile, Republicans have adhered to their oft-stated mantra: “No revenue without reforms.”

In particular, the Majority Caucus — composed of all Senate Republicans and two fiscally conservative Democrats — has offered since the beginning of the regular session to compromise on revenue, but not without an agreement on a handful of policy bills, including changes to the workers’ compensation system and estate tax laws.

The Senate plan also includes an extra $1 billion into K-12 education, while making cuts to social programs. By contrast, the House alternative only provides an extra $700,000 for education but allows for more if lawmakers pass a series of tax increases earmarked for education.

Asked if Democrats were, in essence, guilty of injecting their ideology into the negotiations by refusing to agree to Republican reforms, Inslee brushed aside the comparison.

“The Senate majority has to get off its ideological bandwagon,” he said. “This is a moment where consensus needs to take precedence over ideological beliefs. That message hasn’t been received yet by the Senate majority.”

Inslee said there were no major developments to report in this stage, but said negotiations would be ongoing and that he was hopeful an agreement would be reached in time to avert a shutdown on July 1.

“It’s time for wiser heads to prevail,” he said. “And I believe they will, because they must.”

The Washington State Senate’s Republican-led Majority Caucus on Saturday passed a $33.4 billion operating budget for the 2013-14 biennium and promised to approve a handful of revenue measures to help pay for them — but not unless it can also pass a slate of reforms designed to make state operations more efficient, too.

“I’m all for putting more money and new money into the system,” Sen. Andy Hill (R-Redmond) told his colleagues, “but not put it into the broken system that exists now. We need to fix that system.”

Washington lawmakers are working through the weekend in hopes of completing a budget deal before the current 30-day special session ends on Tuesday. The state constitution requires a new budget be adopted by July 1 to avert a government shutdown and Gov. Jay Inslee last week he will order the Legislature into a second session by Wednesday if necessary.

The Senate will meet again at 1 p.m. on Sunday; the House will not reconvene until Monday.

The budget passed Saturday is similar to the package approved by the Senate in April during the Legislature’s regular 105-day session in that it includes $1.5 billion more spending for public K-12 education, $1 billion of which is earmarked for basic education.

The Washington State Senate on Saturday passed a revised operating budget that leaders like Redmond’s Andy Hill, above, say funds the state’s basic priorities but doesn’t require crushing new taxes that would kill jobs and slow the recovery.

The Legislature was ordered by the Supreme Court  in last year’s McCleary decision to spend more on education, and the Senate plan would do so mostly by cutting the rate of growth in social programs, diverting money from the state’s school construction trust fund and eliminating cost-of-living pay raises for state teachers.

By contrast, the Democrat-backed House budget would make only an $800 million “downpayment” on education, although that number could be increased to more than $1 billion if the Legislature approves an accompanying “trailer bill” that would include tax increases to pay for new education spending.

Republicans argue the constitution makes K-12 education the state’s “paramount duty” and any plan that funds social programs out of existing revenues but requires a tax increase to justify more education spending violates that principle.

“We need to fund education with our first dollar, not our last dime,” Majority Caucus Leader Sen. Rodney Tom (D-Bellevue) said.

Democrats counter that Republicans are using the state’s needy as political pawns when they refuse to pass a budget unless the Legislature also approves a trio of policy reform measures that include modifications to the state’s workers’ compensation system, a measure to cap non-educational state spending, a bill to give veto power to principals over teachers assigned to their schools and a measure on payday loans.

“That’s called taking hostages,” said Senate Democratic Leader Ed Murray (D-Seattle), “and it has one goal — to delay passing a budget bill until after July 1, which would shut down the government and hurt the residents of this state.”

“We’re passing a budget today that funds our priorities and does so without raising taxes,” said Sen. Doug Ericksen (R-Ferndale), “and I take offense at having that compared to taking hostages.”

“The Senate’s approach continues to be best for our state,” said Sen. Don Benton (R-Vancouver). “Any House Democrat who wants to go home and talk about doing great things for our public schools without a broad tax hike should jump at the chance to vote on the Senate plan.

“The House Democrats’ plan wouldn’t come close to matching the Senate’s investment related to the McCleary case,” he added, “even though the House budget would require hundreds of millions of dollars in new taxes. As someone who believes our public schools should be first in line for the tax dollars already being collected in Olympia, the Senate approach is the way to go.”

House Democrats on Thursday night passed a budget that dropped several tax increases included in their earlier budget proposals. They then passed an education funding measure that put several of the revenue components right back in, leading to criticism from Republicans like Rep. Orcutt (above).

House Democrats on Thursday night moved quickly to pass a “compromise” operating budget they had unveiled in a press conference only a day earlier. This was followed just hours later by passage of a companion education bill that would replace several of the same revenue features dropped from the earlier budget measure.

Leaders of the Republican-led Majority Caucus in the Senate, meanwhile, held a brief press conference of their own on Thursday afternoon, announcing that they, too, had constructed a budget compromise. Majority Leader Sen. Rodney Tom (D-Bellevue) declined to reveal details of that offer, saying he preferred to negotiate at the bargaining table and not in the press.

The Washington State Legislature is currently nearing the end of a 30-special session made necessary when the 105-day regular session failed to produce a budget agreement. The special session is scheduled for adjournment on June 11 and the state constitution requires there be a budget passed before July 1.

The House Democrats’ budget plan, which passed by a vote of 53-35 with nine excused, calls for between $700 and $800 million in education spending over the next two school years, as required by last year’s McCleary decision in the Washington State Supreme Court, and paid for largely with four tax increases.

The Democrats’ original budget proposal asked for more than $1 billion in new education spending paid for by imposing 11 different tax hikes. Much of what was taken out of the budget, however, would be replaced in an education bill passed by the same House around 11 p.m. on Thursday.

The school funding measure would bring the Democrats’ K-12 spending commitment back to $1 billion by eliminating several tax preferences, including a requirement that nonresidents apply for sales tax refunds instead of getting them automatically.

“We made a significant commitment to education in our regular budget, but we didn’t go far enough,” said Rep. Pat Sullivan (D-Covington). “This bill helps us get to $1 billion. The McCleary decision was a game-changer, and we’re going to have to be more inventive from now on.”

“There’s nothing new or bold in this plan,” countered Rep. Ed Orcutt (R-Kalama). “It’s simply a tax increase, and we’ve seen lots of those.

“We hear the other side talk about helping the kids,” he continued. “And that sounds great. But a tax increase will cost jobs, and you can’t help kids by making it more difficult for employers to hire their parents.”

Republicans also argued that the education money should be rolled into the main budget bill rather than included in a separate spending measure and criticized a proposal to transfer nearly $400 million from the capital budget for public works projects.

“We believe education should be funded first,” Orcutt said. “But if you fund all of your other programs with normal budget revenues but need a tax increase to fund education, you’re putting education last, not first.”

“We’re here to to one thing during this session, and that’s to fully fund education,” added Rep. Cathy Dahlquist (R-Eatonville). “But this bill doesn’t do that. It holds our kids hostage to a tax increase.”

“This is a ‘trailer bill’ that puts our kids in the trailer when they deserve to be riding up front,” said Rep. Gary Alexander (R-Olympia). “It takes tax dollars from our economy and kills jobs when we don’t have enough jobs as it is.”

House Republicans prefer a plan similar to the budget passed weeks ago by the Republican-led Majority Caucus in the Senate. That budget would earmark $1.4 billion for new education funding by making cuts to social programs rather than raising taxes.

GOP leaders say they must balance the court’s demands to spend more on schools with the public’s repeated rejection of new taxes. Alexander said House Democrats were trying to circumvent the will of the voters by attaching an emergency clause to the education funding bill, which would exempt it from a referendum on the general election ballot next fall.

“What are you afraid of?” he asked. “If this is such a great thing, why are you shutting the voters out of the process rather than letting them validate your choice?”

The House is scheduled to reconvene on Friday at noon.

Most of the difference — $48 million — came through a one-time audit payment, meaning has little bearing on the state’s long-term economic prognosis. Still, it’s a bit less lawmakers need to tax in order to balance Washington’s books with the Legislature only a few days away from the end of a 30-day special budget-writing session in Olympia.

“As in March, the risks to the baseline remain high due to uncertainties outside the state,” Steve Lerch, executive director of Washington’s Economic and Revenue Forecast Council, told lawmakers on Thursday.  “The Washington economy continues to grow slowly, with employment rising in most sectors except aerospace and government.”

Washington’s chief economist Steve Lerch on Thursday told lawmakers the state’s revenue picture was slightly improved from the April forecast, but the ongoing recovery is the slowest from any recession in recent history.

The report also said the state economy is generally behaving as expected in the March forecast and that factors outside the state are mostly responsible for any uncertainty. Those factors include the European banking crisis, the continuing inability of the U.S. Congress to settle its own budget crisis, turmoil in the oil-producing states of the Middle East and the possibility of economic setbacks in China.

“Overall, our preliminary June forecast of Washington employment is slightly higher in 2013 due to historical data revisions,” the council’s report said. “Growth is weaker during the second half of this year and early next year as a result of greater fiscal headwinds from the federal government and a larger decline in aerospace employment, partially offset by stronger construction employment growth.

“Over the entire period from 2013 through 2017,” it continued, “the new Washington employment growth forecast averages 1.8 percent per year, the same rate as in the March forecast. Our new forecast for personal income growth averages 4.7 percent per year in 2013 through 2017 compared to 4.8 percent per year in the March forecast. Personal income growth in 2013 is higher … but growth during the remainder of the forecast is lower than in the March forecast.”

Among the report’s other conclusions for Washington:

• In the two months since the March forecast was adopted, the Washington economy added 4,600 jobs, 4,700 fewer than the 9,400 expected in the March forecast. As a result of the upward revisions to history and weaker than expected growth, the net effect is 4,300 (0.2 percent) more jobs in April 2013 than expected in the March forecast.

• Manufacturing employment declined 300 from February to April. The forecast had expected an increase of 1,000 manufacturing jobs. However, construction employment grew 1,300 compared to our March forecast of 1,000 net new construction jobs. Government employment remained weak with a loss of 800 jobs during the last two months.

• The main change on the downside since the April forecast is a greater decline in aerospace employment. The agency now expects a decline of 3,500 jobs from December 2012 to December 2013 compared to a reduction of 1,300 jobs in the March forecast. As of April 2013, aerospace employment has already declined 900 since December.

• Washington wages were higher than believed in the March forecast. As a result, the forecast for Washington personal income by was raised by $2 billion (0.6 percent) in 2013.

•  Once again, housing activity was a pleasant surprise. Total housing units authorized by building permits averaged 36,000 (SAAR) in the first quarter of 2013, up from 31,000 in the fourth quarter. The March forecast had assumed 33,700 units in the first quarter. Housing hasn’t been this strong in Washington since the fourth quarter of 2007.

• Washington light vehicle sales rose in May for the first time since a huge jump in January. There were 249,800 (SAAR) new vehicle registrations in May, up 1.5 percent from April but down 8.9 percent since January. Washington new vehicle registrations in May were 4 percent higher than in the previous year.

• Washington exports grew 7 percent from the first quarter of 2012 to the first quarter of 2013, down from 14.9 in the fourth quarter of 2012. The slowdown in growth was due to transportation equipment (mostly Boeing planes) which slowed from 24.4 percent year-over-year growth in the fourth quarter to 5.6 percent  growth in the first quarter. Excluding transportation equipment, year-over-year export growth improved to 8.3 percent in the first quarter from 6.5 percent in the fourth quarter.

“We’re seeing some positive signs in Washington’s economy,” Lerch said. “We’re back to collecting more revenue than before the recession hit in 2007, but this is still the slowest recovery from any recession in recent years.”

Washington state Republican leaders, including Rep. Gary Alexander, above, say a new budget proposal from Democrats is a good first step, but it may not be enough to bridge the gap between the two parties by the time the current special session is set to adjourn on June 11.

House and Senate Democrats on Wednesday unveiled what they characterized as a budget compromise that makes increased investments in education without shredding the safety net.

“We’ve been meeting every day and working hard, in good faith,” said Majority Leader Pat Sullivan (D-Covington). “To finish our work and avoid a Washington, D.C.-style shutdown of state government, it’s time to start voting. This proposal is a significant compromise.”

The Washington State Legislature is currently in the waning stages of a 30-day special session scheduled to end on July 11.

The Democrats’ base proposal would add a minimum of $704 million to Washington state’s K-12 schools and $93 million to higher education system — far less than Democrats had originally sought and less than the $1 billion proposed by the Senate’s Republican-lead Majority Caucus. The difference is that the GOP plan takes money that could be used to support social programs to fund education without the necessity of a tax increase, while the Democratic plan depends on a tax increase to continue funding social programs while paring down education spending.

“Our hope in January was a bold investment in education,” said Rep. Ross Hunter (D-Medina), chair of the House Appropriations Committee. “This budget is a downpayment — not as much as we’d like, or we passed out of the House — but it does allow us to move forward in reducing class size, investing in all-day kindergarten and supporting college students.”

In all, the gets rid of seven tax breaks worth about $255 million — down from the House’s original proposal to eliminate 11 tax breaks.

Among the tax breaks off the table is one that would target out-of-state shoppers do not have to pay Washington’s sales tax if they’re from a no-sales-tax state like Oregon. The shoppers would have to apply for a refund instead of getting it automatically at the checkout counter.

Democrats also dropped a plan to extend a business-and-occupations tax surcharge on a wide variety of service professionals, including realtors, car dealers, doctors and lawyers. It would have raised about $500 million.

“This compromise is a modest budget, but it’s also a budget that does no harm,” said Sen. Jim Hargrove (D-Hoquiam), the ranking member of the Senate Ways and Means Committee. “This budget is pretty darn close to what I had in mind three months ago.”

Lawmakers also introduced a companion measure, the Education Investment Act (House Bill 2048), that would redirect another $255 million into the Education Legacy Trust Fund by closing tax breaks.

“Our state has 640 tax exemptions on the books,” said Rep. Reuven Carlyle (D-Seattle), chair of the Finance Committee. “Some work to create jobs and some don’t. But what we do know for certain is that closing 1 percent of them to invest in 1 million kids is the right choice.”

“This budget addresses a key concern of Senate Republicans,” said Sen. Sharon Nelson (D- Maury Island), the assistant ranking member of the Senate Ways and Means Committee. “It provides a tax cut for over 144,000 service businesses and breweries. At the same time, it’s a budget that upholds our Democratic values and our values as a state, and makes much-needed investments in our state’s future.”

Republicans say they are happy to see Democrats backing off many of their tax demands but still insist that any revenue package be tied to systemic reforms.

Olympia Rep. Gary Alexander, the Republicans’ chief budget negotiator on the House side, also expressed concern that the Democratic plan was unveiled publicly in a press conference rather than at the bargaining table.

“To me, this looks like a step back from the negotiating table. Negotiating through the media by staging press conferences by the governor and House Democrats doesn’t bring the two chambers together.

“In my opinion, this is the type of proposal that would serve us well if it was brought to all parties negotiating the final budget,” he said. “In fact, I was prepared to bring a ‘straw budget’ to the negotiating table in a good-faith effort to bring the two sides together. This could have generated more open dialogue, perhaps leading to a final compromise budget that invests in education, protects the most vulnerable and ensures the public’s safety while protecting taxpayer dollars.

“In the end, however, while this proposal has the possibility of bringing both chambers closer together,” Alexander said, “the process they used may very well drive us apart.”

Members of the House are scheduled to convene Thursday morning.