By Ryan Wynne

Sound Beverage Distributors, Inc. was founded in 1950 by present-day manager Mark Shintaffer’s grandparents, Dale and Elaine Shintaffer. In its 60 years, the company has grown from four employees to 85 and, despite the ups and downs of the economy, has never laid off an employee. The current recession, however, has done little to impair business for the distributor — until now.

As part of its strategy to close a $2.8 billion deficit, the state Legislature recently made big cuts and increased some taxes, including the tax on mass-produced beer. Sound Beverage Distributors’ main product is beer, and Mark said the beer-tax increase could soon tarnish the business’s clean track record.

“We are anticipating some layoffs around here already,” Mark said, with the caveat that nothing is set in stone and that the business is just preparing at this point. “We are scared enough to at least have the discussion.”

This is an odd year for legislators to deal with budget issues. The state came out with its 2009-11 biennium budget last year, at which point it closed a $9 billion shortfall. However, six months after signing a balanced budget, lagging tax revenue related to the recession led to an additional shortfall of $2.8 billion. That shortfall propelled legislators into a budget session to rebalance the budget, which ended with a 29-day special session.

With the clock ticking down toward the maximum allowable days for the special session, legislators voted along party lines April 13 to raise taxes on some notable items such as beer, soda and candy, and to raise taxes on service businesses.

At the same time, $755 million dollars in cuts were made, many of which were aimed at education.

Still, there are many who believe the government is still spending too much, including Rep. Doug Ericksen, R-Ferndale.

“There have been solutions on the table since day one of the legislative session that would have created jobs, prioritized government and reformed the budget process,” Ericksen said in a press release. “Nearly all of these solutions were pushed aside in favor of new tax increases.”

However, Rep. Kelli Linville, D-Bellingham, said that while the vote was difficult for her because citizens are struggling in this economy, cutting billions more would have been devastating.

“Last year we solved the largest shortfall in state history without raising taxes,” Linville said. “We cut billions of dollars from state programs. But I’m afraid that if we take another all-cuts path this year, we risk irreparable long-term harm to Washington because it would cripple certain basic services that people value.”

In an April 13 press release, Gov. Chris Gregoire said legislators were forced to make some tough decisions and she commended lawmakers for their hard work.

“Tough times require tough choices,” Gregoire said. “It’s taken a little longer than we hoped to find the path forward, but the end result is a good one.”

Tax increases

The legislature’s agreement does little to console Mark Shintaffer. He said his business will likely take a hit from the beer tax, which will go up by 50 cents per gallon beginning June 1. The beer tax will not be applied to microbreweries — those producing less than 60,000 barrels of brew per year.

Mark’s company distributes microbrews, but its warehouse is also filled with 20-foot walls of mass-produced beer, such as Budweiser. Because of state liquor laws, distributors have to pay taxes for the beer they deliver. Mark said his company sometimes eats slight tax increases to avoid dips in sales that could result from passing them on to consumers, but this increase is too significant and must be passed on.

When prices go up, Mark is afraid sales will go down.

The same could be true for soda, candy, bottled water, tobacco products and lottery tickets. The new tax bills, approved by Gregoire April 23, are expected to increase tax revenue by $757 million by increasing taxes on those items and others, by closing loopholes and by establishing new taxes.

Certain new taxes could actually benefit some Washington businesses, according to Mike Gowrylow, Washington State Department of Revenue spokesman. One of the budget provisions established a tax for out-of-state businesses doing business in Washington, such as banks, and that is expected to bring in approximately $85 million in new revenue. Gowrylow said that decision could help Washington businesses be more competitive with non-state companies.

“That might mean increased business for in-state businesses,” Gowrylow said.

The Legislature also voted to increase the B&O tax for service businesses except hospitals and scientific research and development activities. It will go up from 1.5 percent to 1.8 percent. Approximately 45 percent of Whatcom County businesses will be affected by the rate change, but that doesn’t figure in the amount that will benefit from another change: the doubling of the small business tax credit.

“There is some good news for smaller operations,” Gowrylow said.

He said approximately 74,000 of Washington’s 137,000 service businesses will benefit from the credit increase, which is 14,000 more than were previously able to take advantage of it. Before budget provisions, service businesses generating more than $56,000 in annual service income paid the B&O tax at a regular rate without tax credit compensation. With the increased credit, businesses can gross up to about $80,000 per year without incurring additional B&O tax liability, and in some cases will pay lower taxes.

Among other provisions, Legislators also voted to temporarily suspend a sales tax exemption affecting livestock nutrient management, repeal a property management salary exemption, limit the bad debt deduction on retail sales and require corporate boards of directors to pay tax on their fees.

Spending cuts

The amended budget is not just based on revenue generation, though. Many state-funded programs and jobs will be affected by cuts. With both 2009-11 budget sessions combined, legislators cut approximately $4 billion in spending. As of press time, 3 p.m. April 23, Gregoire had not approved provisions regarding budget cuts.

In its recent session, legislators reduced funding to higher education by $73 million. Western Washington University, one of Bellingham’s top employers, took a base budget hit of $3 million in recurring cuts and $1.2 million in one-time cuts.

“As painful as this cut will be, any better outcome was highly unlikely,” Western Washington University President Bruce Shepard said in a campus-wide letter. “And, given the state’s situation, much worse outcomes could have occurred.”

The reductions come as Western is dealing with the state’s initial $44 million cut to its 2009-11 base budget, which was made when the state’s original budget was approved. That budget cut funding to public colleges and universities by $557 million.

Western offset effects of the initial reduction with tuition increases and federal stimulus funding — bringing the net reduction down to $18.9 million — that’s about $9.5 million when split between both years — and brought it down further by reducing its operating budget.

Now, facing a 2010-11 base budget cut totaling approximately $12.5 million, Western is considering eliminating positions. Last year 164 positions were eliminated and this year another 39 could be affected, 10 of which are currently occupied and would either be eliminated or see reduced hours.

“The university is being squeezed pretty severely at this point,” Western Communication Director Paul Cocke said. “There have been layoffs and there will be layoffs. It’s not easy on anyone.”

With both cuts, the state’s contribution to institutions of higher education has been reduced to a level near the minimum required for receipt of federal stimulus funds.

Cocke said cuts like these don’t just hurt the university, they hurt the entire community — 2,100 employees and 14,000 students spend their money in the community, he said.

“It’s in everyone’s interest that Western remain as strong an institution as possible,” Cocke said.

Higher education wasn’t the only educational target for budget cuts. The remaining $79 million in Initiative 728 per student allocations to school districts was eliminated, which will be felt in Whatcom County. Also, the grade 4 class size enhancement was reduced by $30 million, and legislators saved another $15 million by eliminating the learning improvement day for teachers.

Major cuts extended beyond education. Based on legislation requiring temporary layoffs or salary savings, legislators reduced funds to all areas of state government by $49 million. Correctional facility capacity was reduced by $46 million, information technology funds were reduced by $30 million, and Security Lifeline programs saw a cut of $28 million.

Preserved programs

As deep as the cuts may be, they would preserve funding for a variety of programs. The budget includes $631 million in new revenue that will help support state programs.

One critical program for students that will be preserved is the State Need Grant, a need-based financial aid for students from lower income families. Shepard commended legislators for restoring State Need Grant funding and for partially restoring funds for the work study program.

The funding would also support the Basic Health Program, which will continue to offer health insurance for more than 60,000 Washingtonians, the levy equalization program, which provides state financial support to school districts with a lower than average property tax base, maternity services for at-risk mothers, and hospice care for thousands of low income Washingtonians.

Although she showed support for the Legislature’s decision to preserve programs by raising some taxes, Gregoire was adamant that voters realize significant reductions were made.

“While new funding will be generated to support needed state programs, I want to be clear that we will be cutting more from the budget than what will be raised in new revenue,” Gregoire said. “This means layoffs at state agencies, facility closures and larger class sizes for our young students. All Washingtonians, in one way or another, will feel the effects of these painful reductions.”

Until November

The 2009-11 budget drama is not quite over. Immediately after legislators adopted budget provisions, initiative activist Tim Eyman filed initiative measures that would roll back the new taxes. In order to get the initiative on the November ballot, Eyman would have to get 241,153 valid voter signatures.

At the same time, Bill Gates Sr. has filed an initiative measure that would create a state income tax for couples making a joint income in excess of $400,000, or $200,000 for individuals. The bill would also reduce the state property tax by 20 percent and eliminate the B&O tax for all small businesses, which, according to the initiative, would provide middle class tax relief. Funds from the tax would be dedicated to improving education and health services.

If the new initiatives make the ballot, voters will also get to have a direct say in budget matters, but even without the initiatives the November ballot will give voters a chance to tell legislators whether they agree with budget votes — all of the state House seats and about half of state Senate seats will be on that ballot.