Economic and Revenue Outlook

Continued Revenue Shortfall Despite Policy Interventions

Revenue forecasts for the 2025–27 and 2027-29 biennia continue to signal emerging fiscal pressures. The March 2025 outlook forecasts for the four-year period came in $1.2 billion below the September 2024 outlook prompting the Legislature to pass and the governor to sign into law a package of corrective measures focused on reducing inefficiencies, controlling expenditures, and enacting targeted tax policy changes to stabilize the revenue base. Excluding these changes, the June 2025 forecast revealed a decline in projected revenue ($490 million in 2025–27 and $638 million in 2027–29).

The September and November 2025 forecasts continued to show that revenue growth remains fragile, landing a cumulative $966 million below the June forecast despite earlier policy interventions. This pattern underscores that the state’s revenue challenges cannot be resolved through administrative savings and tax adjustments alone. Instead, they are being driven by broader structural and macroeconomic forces, including rising caseloads, persistent inflation, cooling labor market conditions, and softening housing activity. All of this is exacerbated by major, unprecedented trade shifts and federal spending cuts.

Caseload expands rapidly while revenue growth slows

Washington is entering a new fiscal environment in which revenue growth is no longer keeping pace with the state’s rising caseload demands. The post-COVID period marks a clear structural shift: The General Fund-State (GF-S) is growing slowly, while the cost for core human-services programs is growing rapidly.

Before the pandemic, conditions were far more favorable. GF-S revenues grew at an average rate of 6.5%, while income assistance (i.e., TANF) caseloads declined by 8% and child care caseloads remained broadly stable.

In contrast, the post-COVID period shows the opposite pattern. GF-S revenue growth has slowed to just 2%, while program demand has accelerated. Income assistance caseloads now rise by 7% per year. Caseloads of children living in households receiving subsidized child care are growing even faster, at 17% annually.

There has been a rapid rise in the number of Medicaid clients who need long-term care in community-based settings such as their own home or adult family homes. Before the pandemic, annual growth was around 3%, with the state now seeing 8% growth in caseload numbers each year.

This means caseload growth for core needs consistently exceeds the pace of revenue growth, creating structural pressure on state revenue.

Rising inflation and declining purchasing power reduce state revenue

Washington’s post-pandemic income landscape is entering a period of slower, structurally constrained growth. While nominal disposable personal income continues to rise gradually, inflation remains persistent enough to erode a substantial share of these gains. As a result, increases in income translate only partially into purchasing power, and real disposable income consistently grows more slowly than nominal income across the forecast horizon.

Fiscal year 2025 is the most challenging year in the post-COVID period, with inflation eroding nearly all disposable income gains

Inflation continues to be a challenge for household budgets and the state’s cost of providing services. The gap between nominal and real income widened sharply (from ‑0.53 percentage points initially to ‑0.93 percentage points in June 2025), pushing real income growth into negative or near-zero territory. Even as households see modest increases in nominal income, inflation more than offsets these gains, resulting in a clear decline in purchasing power — the weakest real income performance in the post-COVID period. This loss of purchasing power affects sales taxes, as it makes it harder for many families to maintain their standard of living and buy goods and services.

Not only is household purchasing power being eroded by persistent inflation, but the purchasing power of the state is similarly being eroded. Just as families must pay more for home goods and utilities, the costs for these items also increases for the state as a purchaser. Additionally, many state service fees — set in statute by the Legislature — have not been adjusted for inflation over time.

For example, during COVID-19, trauma cases became more severe due to increases in domestic violence, behavioral health crises, substance use, and other high-risk behaviors. Yet the trauma care fund still depends on fees set by the Legislature in 1997 — a $5 traffic-infraction surcharge and a $6.50 vehicle fee — that have never been adjusted for inflation. If they had been, these respective fees would be roughly $10.80 and $14.10 today. In the absence of this adjustment, the system has been left significantly underfunded while caseloads rise and federal support declines.

As the cost of providing services rises and fee levels remain static, the real value of these revenues declines. This has left the state increasingly underfunded to sustain core services, maintain service quality, or invest in needed improvements.

Employment is cooling in Washington and nationally

Washington’s labor market showed clear signs of cooling in 2025, and this continues to impact the state’s revenue outlook. By spring 2025, employment was essentially flat relative to the prior year, reflecting a slowdown in hiring across multiple sectors. The unemployment rate remains slightly higher than one year earlier, indicating a labor market that is softening but stable.

Sector trends reinforce this broader moderation. While aerospace employment saw gains in 2024, the sector lost momentum by mid-2025 as hiring levels normalized. Construction employment  remained below year-earlier levels throughout the year, consistent with weaker real estate activity and higher financing costs. Software publishing continued to contract year over year, making it the largest contributor to job losses as the tech sector restructures. The slow job market reduced consumer spending, which ultimately reinforced the state revenue shortfall.

Housing shortages and affordability challenges

Housing construction remains subdued, with the 12-month rolling average of permits holding near 35,000, well below the 45,000–55,000 range typical before COVID-19. This continues the post-pandemic decline that began in 2023 as higher financing and construction costs weighed on new building activity. Persistently elevated mortgage rates near 7% kept both developers and buyers on the sidelines, limiting new supply despite the state’s long-term housing needs. Lower housing activity affects the state’s revenues as it reduces real estate and property taxes.

Washington faces several risks ahead

Washington state faces significant risks in the coming months from both federal spending reductions in key programs and the economic effects of new tariff regimes. The Office of Financial Management’s (OFM) initial analysis of the Liberation Day tariffs indicated that the policy could reduce state revenues by $2.2 billion and eliminate approximately 31,000 jobs in Washington alone. As of December 1, U.S. tariff rates have fallen to half of their April levels, leading OFM to revise its estimates. The updated analysis projects a smaller (but still substantial) impact, with expected job losses ranging from 13,000 to 20,000 and revenue losses between $900 million and $1.4 billion.

Washington’s economy is entering a period of growing fiscal strain as multiple external forces — persistent inflation, slowing real income growth, rising human-services caseloads, cooling labor markets, elevated housing costs, and major global trade shifts — erode the state’s revenue base. These external pressures, combined with emerging risks from federal spending cuts and tariff-related job losses, remain significant challenges for Washington’s budget. This proposal takes targeted steps to address them within our limited resources