Revenue Forecast: Tax increases passed this year mean higher forecast, but not as high as originally hoped

Arun Raha, the state’s top economist, is giving the latest revenue forecast now. After his usual jokes, he described how the state arrives at the forecast.

“Events have pretty much unfolded along the lines we expected in February,” which was the last forecast, he said. “The economic recovery appeared to lose steam in May,” he said: The May job report was “disappointing,” retail sales reports were weak, consumers are a little more confident, but the strength of community banks and construction weakness remains. “We now expect near-term weakness but a continuing recovery.”

Raha said the bottom line is that the revenue forecast is $558 million higher than predicted because of the $800 million tax package passed by the Legislature — and $1.8 billion higher for the next biennium for the same reason.

Raha called that boost a “noneconomic factor,” meaning the increased revenue isn’t due to increased economic activity, but rather increased taxes. Also of note: The tax package, which was booked as about $800 million, is not expected to bring in that much cash. So, though the forecast is up since February, it’s still about $200 million short of lawmakers’ expectations.

Raha said the economic forecasts have been on target for a year, but the revenue forecasts have only been on target since November. “We have now seen growth in Gross Domestic Product and consumer spending for three consecutive quarters,” he said, but growth rates have and will continue to fluctuate.

“Private job growth, which had seen a robust 218,000 growth in April, slowed to just 41,000 in May,” he said. He said Washington will outperform its neighbors in job creation, but that will likely lead to more people moving here. So: He wouldn’t be surprised if the unemployment rate goes up, but he thinks unemployment will not top 9.5 percent — lower than the 10 percent peak he initially forecasted.

“This recession was much, much worse than ’81-’82 for our state,” he said. “At this stage in ’81-’82, all the lost jobs had been recovered,” but this time around, jobs won’t be back until 2012.

Raha said consumer confidence is slowly improving, but “remains somewhat restrained” by the high unemployment rate.

Raha said the asset quality of banks are “getting worse slower,” which is a good thing. But credit conditions remain tight for small businesses.

On home sales: Raha said the tax credits — $8,000 for first-time buyers and $6500 for other buyers — worked to get people to buy houses. But: “Both tax credits have expired at the end of April and we expect the nascent recovery to flatten out in the near-term,” he said.

While housing will remain weak, remodelling will pick up, he said. He also said this is the worst downturn in nonresidential construction in 30 years. “The rate of decline in contract value appears to be slowing this year, but we don’t expect a positive number until 2012.”

Raha said most — $1.6 billion — of the increase in next biennium’s forecast comes from the new revenue package, while the rest –  $200 million — is from “mosestly better” economic factors.

“Excluding the revenue package, the growth would have been closer to 8 percent” for fiscal year 2011. He said even with the tax package passed by the Legislature this year, fiscal year 2011 won’t reach the levels of fiscal year 2008. That will happen in 2012, he predicts.

“I’d like to thank you all for buying cars and spending more over the holidays. Thanks to you, things have improved but we are not out of the woods yet,” he said. So: “Over the summer, please take your family on vacation, perhaps in the new SUV you just bought … stay in-state,” he said, it’s “a win-win.”

Now for questions:

As for what the revenue projection means for the budget, Marty Brown said it’s not good.

Rep. Ross Hunter said they expect “these numbers to move around” a bit before session, but that the state has a $253 million ending fund balance built into the budget.

But: That $253 million includes FMAP — the expected federal Medicaid match that may not come through after all.

“If we come to the conclusion that it’s not going to happen, we should work together with the Governor … and take across-the-board action,” Hunter said. “You certainly want to start taking measured steps, starting certainly in August or September.”

Tags: Economic and Revenue Forecast