State revenue forecast trimmed as tariffs and weak hiring damp growth, ERC tells finance committee

Dr. Reich, an economist with the Economic and Revenue Forecast Council, told the Finance Committee during a hybrid work session that Washington’s economy is expanding only modestly and that rising tariffs and federal spending disruptions are the principal risks to near‑term revenue collections.

"Dealing with risk is probably the more important part of our judgment," Dr. Reich said, describing the council’s mix of statistical models and judgment in forming forecasts.

ERC staff explained the forecasting process used to produce the council’s official numbers: staff generate national and state economic scenarios (the federal model is a modified S&P model and a separate Washington model is used for state variables) and the ERC — a panel with executive and legislative members — reviews and adopts the final revenue forecast. The council meets quarterly and posts methods and assumptions publicly.

The presentation highlighted several structural revenue points. Retail sales tax, the business & occupation (B&O) tax and property tax together account for roughly three‑quarters of state operating revenues, ERC staff said. Taxable sales growth has been unusually weak: employment growth in Washington was near 0.3 percent year‑to‑date, and real GDP growth for the state has been slower than the 20‑year average. Exports were up year‑to‑date — largely reflecting stronger transportation‑equipment shipments tied to Boeing — but most industry sectors are either flat or contracting.

Tariffs were singled out as a major new influence on prices and trade. ERC staff cited a Yale Budget Lab estimate of an average U.S. tariff rate near 17.9 percent and said higher tariffs are expected to push price levels up and output growth down in the near term. The federal government shutdown at the time of the briefing was cited as an additional downside risk, with staff noting macro impacts generally grow with the length of a shutdown.

On the revenue side, ERC staff reported a September revision that reduced general‑fund receipts for the 2025‑27 biennium by roughly $317 million and trimmed total forecasted revenues by about $412 million versus the June projection. The reductions were driven primarily by lower expected retail sales tax receipts and lower real estate excise tax (REIT) collections, ERC staff said. For the 2027‑29 window the general fund revision was about a $371 million downward adjustment.

Dr. Reich said the ERC continues to refine techniques — including early use of machine‑learning methods on the transportation forecast — and that the council will publish the next quarterly forecast in November. Members and staff told the committee they will monitor tariffs, labor market updates and incoming data once federal reporting resumed.

Committee members asked practical policy questions. Representative Chase asked whether deficits should be closed by cuts or borrowing; Dr. Reich said budget choices are for elected officials and agencies such as the Office of Financial Management. Representative Santos asked whether Washington typically lags national cycles; Dr. Reich said timing varies by recession and sector. The ERC presentation closed with staff noting the next forecast cycle and their availability to answer further committee questions.

Looking ahead, ERC staff described the council’s role in providing a common, transparent revenue baseline for state budgeting and noted the risks that could push outcomes away from the baseline if tariffs or federal actions change materially.

(Proof: ERC presentation and Q&A with the Finance Committee; first related remarks at 00:00:35 and final ERC discussion at 00:33:26.)