Washington Gov. Bob Ferguson entered office warning that a multibillion-dollar budget shortfall would require spending cuts and, as a last resort, higher taxes.

On Tuesday, the first-term Democrat appeared satisfied with lawmakers’ work to close the financial gap, signing a two-year state budget and a tax package to produce billions of dollars in new revenue to keep it in balance.

“To get a budget in a challenging situation to the finish line, it’s going to require working together and a lot of compromise,” Ferguson said. “I believe we accomplished that with this budget.”

Ferguson’s approval ended weeks of speculation about whether he would reject tax increases in favor of deeper cuts. It also capped off months of wrangling between the governor and Democratic lawmakers over how far to go in raising taxes. Republicans slammed Ferguson for agreeing to the hikes after he’d voiced support for greater fiscal restraint.

This all came in the face of an estimated $16 billion shortfall over the next two budget cycles and uncertainty about federal funding.

Also Tuesday, the governor approved a 6-cent increase in Washington’s gas tax to ensure planned transportation projects move forward.

In the end, he only used his veto power to remove one significant piece of a tax bill, related to community banks, and to nix about $25 million from the operating budget.

Sen. June Robinson, D-Everett, the lead budget writer in the Senate, said she was “very pleased” with the limited use of the veto pen.

“I think he’s sincere and understands the difficult decisions that were made,” she said. “The fact that he didn’t make significant changes shows he respects our views.”

The two-year operating budget signed Tuesday calls for $77.8 billion in spending across government, including public schools and colleges, health care, social services, housing, corrections, and environmental protection. It also funds new two-year collective bargaining agreements with most, but not all, public employee unions.

It relies on about $4 billion from new and higher taxes and transfers from other accounts into the general fund, the central pot of money used to pay for most state spending. The state will end the fiscal cycle with $225 million in cash reserves and $2 billion in its emergency or rainy day fund.

The suite of revenue bills inked by Ferguson includes a permanent across-the-board boost in business taxes, a temporary surcharge on high-grossing firms, and higher tax rates on large financial institutions and computing giants. Sales tax would be applied to more services, some tax breaks disappear, and an existing tax on tobacco products gets broadened to include nicotine pouches, like Zyn.

A wide swath of private sector firms and health care providers urged Ferguson to reject some of the measures, insisting higher costs would be passed on to customers and patients. For the most part, he did not heed their requests.

However, he restored a tax break for community banks that allows for a tax deduction for interest they receive on loans for residential property. That exemption helps people afford housing, he said. It will trim the tax package by $215 million over four years, a state budget official said.

Republicans panned the governor’s approval of the taxes as an about-face.

“On his first day in office, Governor Ferguson spoke of fiscal responsibility, yet today he’s supporting the largest tax increase in state history,” Senate Minority Leader John Braun, R-Centralia, said in a statement. “That’s disappointing. The majority Democrats who don’t believe government can ever have enough money were unhappy with him back then; they must be elated now.”

Ferguson said he planned to further scrutinize the tax increases on businesses in the interim.

“There are some revenues there that I think require a closer look to make sure there are not unintended consequences,” he told reporters Tuesday. “So I would not be surprised if you see some changes beyond technical changes to those revenue streams.”

Critics of where majority Democrats landed point out that state spending with the operating budget has increased from roughly $38 billion to upward of $70 billion over the past decade. Spending in the current two-year budget cycle that ends June 30 is around $72 billion.

Transportation budget also rides on tax hikes

Ferguson also approved separate spending plans for transportation and capital construction for the 2025-27 biennium that begins July 1.

The $15.5 billion transportation spending plan funds Washington State Ferries, highway megaprojects and maintenance of state roads and bridges. Washington State Patrol and public transportation are also paid for through this budget. And there’s over a billion dollars for the court-ordered removal of barriers to fish in waterways that cross under state roads.

Similar to the operating budget, transportation faced a major shortfall due to diminishing gas tax receipts and ballooning costs for the state’s already-expensive road projects.

To fill the gap, Ferguson signed a separate six-year, $3.2 billion transportation revenue package intended to pay for promised infrastructure. While the state’s first gas tax hike since 2016 anchors it, there are a number of other new and higher fees and taxes, including on rental cars, non-commercial aircraft, luxury vehicles and car sales, among others.

Washington’s gas tax — already among the highest in the nation — will rise from 49.4 cents to 55.4 cents per gallon in July, then by 2% each year.

“The people of the state of Washington expect us to invest in those projects, but we have limited revenue options right now,” Ferguson said. “The gas tax, unfortunately, is one of them.”

The capital budget authorizes $7.6 billion in new spending. It will drive $760 million into affordable housing, most of it through the Housing Trust Fund. There’s nearly a billion dollars for K-12 school construction, plus funds for salmon recovery and behavioral health facilities.

How we got here

In the final weeks of the session, Ferguson objected to budgets passed in the House and Senate, saying they each relied too much on taxes. At that time, he called on lawmakers to “immediately move budget discussions in a different direction.”

Before that, he refused a proposed “wealth tax” on investments held by the richest Washingtonians. He felt the new tax was sure to face legal challenges that could threaten the stability of the state’s budget and that it would be difficult to implement.

In response, Democratic lawmakers dropped the idea for this year. The new governor also opposed a proposal to repeal a voter-approved limit on property tax growth in Washington, so legislators abandoned that, as well.

By the time Democrats’ slate of revenue proposals reached the governor’s desk, lawmakers had dropped it from a total of $21 billion over four years to $9.4 billion, excluding the separate transportation taxes and fees.

Lawmakers are scheduled to next return to Olympia in January, when they will hash out a supplemental funding plan for the final year of the cycle.

But Ferguson didn’t rule out a special session before then to deal with potential havoc wreaked by the Trump administration or cuts under consideration by the Republican-controlled Congress. He said federal funds make up about one-fifth of Washington’s budget.

The state will get its next forecast for revenue estimates in June.

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