Supply-side Laffer embarrasses Washington State GOP

Supply-side economics is causing something of a political stirring in Washington State. Just as lawmakers gather to consider raising taxes to cover a growing deficit in state spending, Arthur Laffer has produced a study claiming no new taxes are needed.

The report was embarrassing to many Republican legislators who seem about ready to swallow their campaign promises not to raise taxes.

Without either raising taxes or severely cutting social service programs, the state's budget will be out of balance by some $700 million, officials have warned.

Mr. Laffer didn't exactly butt into the situation uninvited. His consulting firm, A. B. Laffer and Associates, was hired by House Speaker William Polk to study the state's fiscal problems.

The firm concluded that only small cuts in government spending and no new tax increases will be enough to produce a balanced budget.

Since the report was published, it has been hard to find anyone in the state that agrees with its conclusions. One University of Washington economics professor called it a ''supply-side fairy tale.''

Even Representative Polk seemed to be lukewarm about it, telling reporters it was just another piece of information to help the lawmakers do their work.

Both Gov. John Spellman (R) and a majority of the members of the Washington Legislature campaigned in 1980 on a promise not to raise state taxes.

By and large, they kept that promise when they came to the state capitol earlier this year.

Since that time, however, state revenues have gone from bad to worse. By late summer the state was forced to borrow some $400 million to pay its bills.

This fall Governor Spellman called an emergency session of the Legislature and proposed that it enact increases in the state's sales tax and business and occupation taxes to raise more than $700 million.

Aside from the immediate fiscal problem, the controversy has raised some interesting questions about the application of supply-side tax theories to regional economies.

Laffer's theory - that lowering tax rates can increase tax revenues by spurring the economy - formed the underpinning of the Reagan administration's economic recovery program.

Indeed, during the late 1970s supply-side economics seemed to be working in the State of Washington.

Even though taxes have been steadily falling in Washington since 1977 when voters repealed the sales tax on food, the booming economy brought in enough tax revenue to meet state expenses and even increase state spending for schools.

But beginning last spring the economy of the Northwest began to turn sour and tax revenues dried up - producing the current fiscal crisis.

In retrospect it seems clear that the state of the economy had less to do with the tax structure than it did with national interest rates which cut off home construction and plunged the state's important forest product industry into depression.