Bolstered by Real Estate Excise Taxes, state revenues come in 4.8 percent above November forecast in latest monthly update.

Another positive update from the Economic and Revenue Forecast Council. As the chart shows, the state has been on a steady upward trend. This month comes with a REET twist. 

ajor General Fund-State (GF-S) revenue collections for the December 10, 2019 – January 10, 2020 collection period came in $85.0 million(4.8%) above the November forecast. Most of the surplus came from December real estate excise tax (REET) collections, which were $74.4 million higher than forecasted due to a rush of sales ahead of a January 1 increase in tax rates on properties worth more than $1.56 million. The rush in sales will likely decrease future REET collections by an amount greater than the December surplus. Cumulatively, collections are now $168.7 million (3.7%) higher than forecasted.

The Lens reports,

In December 2019, the REET generated $182.7 million in revenue, compared to $94.8 million in December 2018. The second-highest amount for that month in the past five years was $104.1 million in 2017.

Under the new law, the 1.28 percent flat rate was replaced with a graduated rate determined by property sales prices ranging from 1 percent for properties under $500,000 to 3 percent on properties worth more than $3 million. Developers have warned that the restructured tax will affect commercial real estate the most and could shift investments away from Washington and to other states with lower REET rates. Developers also anticipated strong commercial sales in December to avoid the new tax rate.

Overall, the state economy continues to grow. ERFC writes,

Total nonfarm payroll employment rose 13,700 (seasonally adjusted) in November and December, which was 500 more than expected in the November forecast. Private services-providing sectors added 7,700 jobs in the two-month period. The manufacturing sector added 1,700 jobs of which 900 were aerospace jobs. Construction employment increased by 800 jobs and government employment rose by 3,600 jobs…

In December, after the forecast was complete, the U.S. Department of Commerce, Bureau of Economic Analysis (BEA) released state personal income estimates for the third quarter of 2019. According to these estimates, Washington personal income rose from $493.1 billion (SAAR) in the second quarter to $498.2 billion in the third quarter. The reported 4.2% growth rate (SAAR) in Washington personal income was the 16th largest among the states and District of Columbia and exceeded the 3.8% growth rate for the U.S. as a whole. Washington personal income growth was boosted by strong information earnings growth in the third quarter but was restrained by below average farm earnings growth.

So far, so good. And a reminder that tax policy influences behavior.

Another push for a low carbon fuel standard, despite its being found to be ineffective and costly in California.

Gov. Inslee is making another push for a low carbon fuel standard (LCFS). Looking back we found our first post on this was in 2015, when it nearly scuttled that year’s comprehensive transportation package. In 2019, the LCFS was back. This week, TJ Martinell in The Lens reports,

Governor Jay Inslee’s Jan. 14 State of the State speech focused primarily on a low carbon fuel standard (LCFS) proposal that in past session has failed to clear the legislature and funding homelessness prevention programs.. Some building advocates say an LCFS would only make housing less affordable, which the state Department of Commerce cites as a driver of homelessness…

Inslee also touted the LCFS proposal via SB 5412 intended to reduce greenhouse gas emissions in the state’s transportation sector. LCFS programs generate credits for entities that provide fuel below the standard and deficits for entities that provide fuel above it. If a deficit occurs, entities must purchase credits from clean fuel providers.

AWB has identified significant downsides to the LCFS, noting that the Puget Sound Clean Air Agency is promoting a regional LCFS that “e would raise the cost of gasoline by up to 57 cents per gallon by 2030 and raise the cost of diesel by up to 63 cents per gallon over the same time period.”

AWB opposes a LCFS for several reasons, beyond that major cost:

  • The regulation will impose private-sector infrastructure costs of up to $2 billion in order to achieve compliance;
  • The PSCAA estimates an LCFS would reduce the Gross Regional Product (GRP) under every scenario considered;
  • In the scenario chosen, the LCFS would reduce the GRP across Washington state by $1.4 billion between its first year of implementation and 2030;
  • The only potential air quality benefit demonstrated is a reduction in particulate matter with a diameter less than 2.5 micrometers, which the agency plainly admits is “mainly as a result of federal vehicle standards”;
  • The agency’s economic analysis does not quantify any of the other pollutants that make up greenhouse gas emissions, nor does it offer any form of an estimate on how regional emissions would be impacted as a result of implementing a LCFS;
  • California officials estimate their LCFS has reduced greenhouse gas emissions in the transportation sector by just 1.4%; and
  • California Legislative Analysis’s Office officials conclude the LCFS is the most inefficient method of reducing greenhouse gas emissions and recommend the state should “amend or eliminate it” all together.

The Lens quotes a building industry representative on the impact of an LCFS on housing costs.

Building Industry Association of Washington Government Affairs Director Jan Himebaugh told Lens recently that an LCFS would also inevitably raise the price of houses. “Residential construction workers aren’t on one job site every day. We have multiple projects across town. It adds a significant amount of money to get to a job to build it, let alone the costs to bring materials to a job site. Material delivery is going to be more expensive.”

In the Everett Herald, Jerry Cornfield reports the measure may face tough sledding in the Senate, as it did last year.

The same moderate Democrat, Sen. Steve Hobbs of Lake Stevens, is running the transportation committee. And he still views a low carbon fuel standard as a pricey and ineffective tool for reducing tailpipe emissions, the largest source of climate-damaging pollutants in Washington.

Enough of Hobbs’ Democratic colleagues apparently shared this position last session to deter caucus leaders from pulling the bill out of the committee and to the Senate floor for a vote.

Cornfield points out that the caucus has a new member. But, Hobbs has a plan.

Hobbs seems to be more of a climate practicalist. He knows it will cost money to save the planet for future generations. He just thinks those paying should be able to reap some benefits now.

To that end, he came up with Forward Washington. It’s a 10-year, $16-plus billion package of transportation improvements largely paid for with a 6-cent hike in the gas tax and new fees on carbon emissions and development. He said he’d swap cap-and-trade for the carbon fee, if it would help win support.

He argues it’s the best available means at the moment for generating enough revenue to undertake major road projects, like replacing the I-5 Columbia River bridge and U.S. 2 trestle, complying with a federal court order to eliminate fish passage barriers, and curbing tailpipe emissions.

And he, too, cites the California Legislative Auditor.

That study found “a broad consensus” among economists that pricing carbon with a cap-and-trade system or a carbon tax is the most cost-effective way to reduce emissions. In contrast, some of the major policies aimed at reducing emissions in the transportation sector — such as the low carbon fuel standard (LCFS) and financial incentives for zero-emission vehicles — appear to be much more costly.

It does seem odd to pursue a policy that has been demonstrated to be inefficient in green California.  An issue to watch closely in the short session.

Washington’s combined state-local sales tax rate ranks 5th in the nation.

Washingtonians know that sales taxes are high here. We don’t have an income tax and most voters don’t want one. It comes almost as a surprise to find that the sales tax here, according to the Tax Foundation, ranks only fifth in the nation.

The five states with the highest average combined state and local sales tax rates are Tennessee (9.53 percent), Louisiana (9.52 percent), Arkansas (9.47 percent), Washington (9.21 percent), and Alabama (9.22 percent).

California, with its famously progressive income tax, has the nation’s highest state sales tax rate. Washington doesn’t make the top 5.

California has the highest state-level sales tax rate, at 7.25 percent.[2] Four states tie for the second-highest statewide rate, at 7 percent: Indiana, Mississippi, Rhode Island, and Tennessee.

We also don’t crack the top 5 for local rates.

The five states with the highest average local sales tax rates are Alabama (5.22 percent), Louisiana (5.07 percent), Colorado (4.75 percent), New York (4.52 percent), and Oklahoma (4.44 percent).

It’s the combination that puts us fifth.

The Tax Foundation finds some nice things to say about sales taxes.

Retail sales taxes are one of the more transparent ways to collect tax revenue. While graduated income tax rates and brackets are complex and confusing to many taxpayers, sales taxes are easier to understand; consumers can see their tax burden printed directly on their receipts.

We thought you’d be interested.

NFIB reports small business optimism remains historically high, despite slight dip in December.

Small business remain generally optimistic, according to the latest survey report from NFIB.

Small business optimism ended the year historically strong, with a reading of 102.7, down 2 points from November. Seven of 10 components fell, two improved, and one was unchanged. An increased number of small business owners reported better business conditions and expect higher nominal sales in the next three months. While frequency of plans to raise compensation fell 2 points, it remains one of the highest readings in the survey’s 46-year history. Small businesses continued to hire and create new jobs with actual job creation matching November’s reading, the highest since May.

The reports are consistent with the NFIB hiring data reported earlier.

Uncertainty, so far, has not dampened expectations.

Although the NFIB Uncertainty Index rose 8 points in November to 80, owners expecting better business conditions increased 3 points to a net 16%. A net 9% of all owners (seasonally adjusted) reported higher nominal sales in the past three months, 3 points above the average reading for 2019. The net percent of owners expecting higher real sales volumes increased 3 points to a net 16% of owners, bouncing back from November’s weak reading. Actual sales volumes are strong, and owners are a bit more certain of future sales growth.

A good report.

With state revenues up $1.1 billion, little need seen for general state tax increase. But some still pursue income tax.

Washington revenues have continually outperformed projections. The Washington Research Council writes in a new policy brief analyzing Gov. Inslee’s proposed supplemental budget, 

Economic growth since the 2019–21 budget was enacted has in- creased the revenue estimate over the four-year period by $1.016 billion.

The governor has not proposed a general tax hike this year, though he has called for tapping reserves to fund homelessness programs.

Still, progressive lawmakers continue to press for an income tax. Jason Mercier with the Washington Policy Center writes

Wasting no time, on the first day of the 2020 session, several lawmakers filed a brief with the state Supreme Court asking justices to reverse nearly a century of caselaw and allow a graduated income tax to be imposed. The brief was filed by Senators Lisa Wellman, Sam Hunt, Marko Liias, Liz Lovelett, Joe Nguyen, Rebecca Saldaña and Bob Hasegawa and State Representatives Eileen Cody, Beth Doglio, Laurie Dolan, Joe Fitzgibbon, Noel Frame, Mia Gregerson, Nicole Macri and Gerry Pollet.

According to the brief:

“This Court should accept review to determine the constitutionality of the graduated income tax passed by the City of Seattle and to find that the legal underpinnings that supported the Supreme Court precedent in the 1930’s no longer exist.”

The Policy Center recently conducted a poll testing public opinion about local income taxes. Unsurprisingly, 

New poll results from Washington Policy Center illustrate widespread, bipartisan opposition to local income taxes. In response to the question, “In your opinion, should local governments be allowed to impose an income tax?”  72 percent of Washington voters said “no.”  Opposition to local income taxes was reflected by large majorities of Republicans, Democrats and Independents.  Even in Seattle, voters opposed a local income tax, though sentiment was split 43 percent yes, 49 percent no.

The Research Council considers the various tax ideas being floated early in 2020, including proposed business tax increases in Seattle and prospects (slim) for a capital gains tax in the Legislature. 

The Association of Washington Business offers an informative overview of the legislative session and what it means for business in this podcast, which begins with a discussion of tax policy issues.

Legislature begins 60-day session Monday. Here’s what some are saying we should expect.

Expectations tend to be modest for the short legislative session that begins Monday. That would seem to be appropriate, after last year’s substantial increases in taxes and state spending. Gov. Inslee proposed a supplemental budget with no general tax increase, though he did call for tapping reserves to fund programs to alleviate homelessness.

The Seattle Times notes that the governor’s budget priorities do not include education.

His office thinks the state — after funneling $12 billion into K-12 education since 2013 — has “largely tackled” the issue…

Legislative leaders appear to share the belief, reporter Neal Morton writes,

Similarly, when state House and Senate leaders joined The Associated Press on Thursday for a preview of their priorities this year, only one — Sen. Andy Billig, D-Spokane — mentioned special education at the top of his agenda. Early learning also got a nod.

That’s not all.

And Washington voters seem to agree with Inslee.

Between 2015 and 2018, as a landmark school-funding case forced the state to fix its broken K-12 budget, education claimed the top spot among voter concerns, according to years of Crosscut-Elway polling data. That case, known as McCleary, ended in late 2018, and now, according to new poll results released Thursday, education has dropped to sixth place among voters’ highest priorities, with homelessness as the first.

In The Lens, TJ Martinell previews the session. Read the story for more detail. Here are his highlights.

Topics likely to be examined this session include:

  • I-976’s $30 car tab limit and its impact to the multimodal fund;
  • A statewide low carbon fuel standard (LCFS) similar to that proposed by the Puget Sound Clean Air Agency (PSCAA);
  • A capital gains income tax;
  • Sound Transit and ST3’s motor vehicle excise tax (MVET) depreciation schedule;
  • Local transportation infrastructure funding; and
  • Land-use, rent control and housing reform.

However, stakeholders say many of these issues are unlikely to gain traction. Among them is the capital gains income tax. Similar taxes have been introduced in recent sessions as stand-alone bills or as part of an operating budget proposal, but none have cleared the legislature. Governor Jay Inslee’s past operating budget proposals have also called for a capital gains income tax – though that is not the case with the 2020 supplemental budget.

The News Tribune reports on four things the Legislature might (or might not) do, based on Thursday’s AP preview. They are housing and homelessness, car tabs, gun background checks, and a very low likelihood that a capital gains income tax  – or any other tax increase – will pass. Here’s what they say about the fiscal issues:

House Speaker-designate Laurie Jinkins, D-Tacoma, said the House will consider the impact of I-976, especially its implications for “folks who are most vulnerable.” Democratic lawmakers have said they anticipate making deep cuts in the transportation budget in response to I-976, but hope to do so without damaging services, such as transit for the disabled and those with lower incomes.

…Billig said there has been bipartisan interest in recent years in making the state tax system more fair, but he hasn’t seen a bill “that will pass in 60 days to help with tax fairness.”..

Jinkins noted that she has sponsored legislation to start levying a capital gains tax for seven years, but she wouldn’t say whether the House would pursue it this year…

Inslee proposed a capital gains tax for last year’s 105-day legislative session, but it didn’t go anywhere.  He hasn’t called for election-year action.

U.S. economy adds 145,000 jobs; wage growth remains weak. State economists see stable labor market.

Today’s jobs report finds the national economy added 145,000 jobs in December. 

Total nonfarm payroll employment rose by 145,000 in December, and the unemployment
rate was unchanged at 3.5 percent, the U.S. Bureau of Labor Statistics reported
today. Notable job gains occurred in retail trade and health care, while mining
lost jobs.

The news on wages was disappointing.

In December, average hourly earnings for all employees on private nonfarm payrolls rose
by 3 cents to $28.32. Over the last 12 months, average hourly earnings have increased by
2.9 percent. In December, average hourly earnings of private-sector production and
nonsupervisory employees, at $23.79, were little changed (+2 cents). 

The Wall Street Journal reports,

A decade of jobs gains is “setting the stage for more robust hiring as we enter the 2020s,” said Andrew Chamberlain, economist at job search site Glassdoor Inc., adding that cooling wage growth was disappointing.

Wage growth “remains the one aspect of the job market that hasn’t fully recovered during the decade since the Great Recession,” he said. The latest data suggest Americans are finding employment, but they aren’t necessarily landing high-paying jobs. December’s slowdown partially reflects a large jump in retail jobs at the height of the holiday-shopping season.

The WSJ adds some insight into the wage report.

The year-over-year gain is still above inflation, but modest relative to other periods with historically low unemployment. Wages for rank-and-file workers grew at a slightly faster rate, up 3% in December from a year earlier, but the pace of those gains has cooled sharply from a 3.6% annual increase in October.

Weak wage growth could in part reflect a calendar quirk. This December the 12th of the month, the date on which the wage survey is based, and the 15th, a common payday, didn’t fall in the same week—something that often leads to artificially depressed wage growth calculations. The dates fall in the same week in January and February.

While 145,000 added jobs is good news, it was below expectations and accompanied by a downward revision of previous forecasts, Calculated Risk reports.

This was below consensus expectations of 160,000 jobs added, and October and November were revised down by 14,000 combined.

The Seattle Times reports state economists remain optimistic.

“We’ve continued to see pretty consistent growth and strong momentum, particularly in the Seattle metropolitan area,” says Anneliese Vance-Sherman, a regional labor economist with the state’s Employment Security Department. “I would expect to see the growth slow as a result of the unemployment rate being as low as it is, but so far, everything has pointed to a very stable and wide-reaching labor market.”

Over the past year, Washington’s ranking in economic growth and competitiveness rose from fifth highest to fourth highest in the nation, according to a September study prepared by the Washington State Economic and Revenue Forecast Council

Hiring challenges remain a problem.

The ERFC’s November 2019 forecast predicts that the statewide unemployment rate will hold steady at 4.5% in 2020 despite slowing growth. [ERFC director and chieff economist Steve] Lerch attributes the numbers to a diminished candidate pool.

“[In 2019] both nationally and in Washington, we’ve had a lot of growth and employment, and we’ve had unemployment rates really come down, and one of the things that you start to see is that there are literally fewer people to hire,” he says.

So far, so pretty good. But we also note the heightened recession worries expressed by business leaders.

Key state Senate Republican transportation leader says the state needs to find a better way to fund highway projects.

State Sen. Curtis King writes in the Seattle Times that 

We need a new, fair way to fund highway projects. Regardless of I-976’s fate, Washington needs a better way to fund highway projects. The state Department of Transportation reports the state gas tax isn’t producing as much revenue as expected due to more fuel-efficient or electric cars on our roads. 

King is the ranking Republican on the Senate Transportation Committee. His short op-ed offers a good preview of the transportation debate we can expect in the coming months. We’ve previously written of the way passage of I-976, which slashed transportation projects, has thrown transportation planning and funding into an uncertain future. Further tossed into the legislative mix is the recommendation of the state transportation commission that lawmakers move to a pay-per-mile tax

Taking note of these events and others, King writes,

Some of my Senate colleagues are offering a sensible long-term solution for Washington’s transportation needs — shifting the state sales-tax revenue from vehicle purchases into the state transportation budget over several biennium instead of continuing to put it in the state operating budget. The operating budget has seen huge increases in revenues, up 17% this biennium alone. It’s logical, given the relationship between vehicles and transportation infrastructure, and would allow lawmakers to maintain and increase transportation investments without adding a tax. That sounds like an approach the voters would appreciate.

Given the likelihood of an economic slowdown and the possibility of a 2020 recession, there will no doubt be concerns raised about any diversion of tax revenues from the general fund. It’s a discussion we expect to follow closely. However that gets resolved, though, King’s core observation is apt: We need a new, fair way to fund highway projects.