First revenue forecast for fiscal year projects modest boost from economic growth, $2.1 billion increase from legislative changes

The Economic and Revenue Forecast Council released its revenue forecast today, showing modest gains from economic growth and the sizable bump from the legislative response to the McCleary basic education funding mandate.

 General Fund-State (GF-S) revenue for the 2017-19 biennium is increased by $279 million due to forecast changes. Legislative changes, which occurred after the June forecast, added $2.1 billion for a total change of $2.4 billion to the 2017-19 biennium. Major legislative changes included an increase in the state property tax levy for basic education, extending sales and B&O taxes to some online sales and repealing the sales tax exemption for bottled water. 

The final U.S. economic forecast is quite similar to the June forecast, while the final Washington economic forecast expects slightly higher employment and personal income than in June.

ERFC also noted risk:

 Risks to the baseline include slow U.S. economic growth, weak labor productivity, and concerns regarding international trade policy and the federal budget.

Among the federal policy risks to state budgets is continued uncertainty about federal tax reform. The Hill reports,

State governments are likely to face a new round of budget cuts and belt-tightening as revenue growth slows, due in part to uncertainty over whether Congress will reform the federal tax code.

The story pegs off a new report from the Rockefeller Institute of Government.

State and local government tax revenues showed relatively strong growth in the first quarter of 2017, compared to the recent past. However, the growth should be viewed with caution as the strong quarter is partially attributable to income tax growth in California and New York, as well as to the shifting of bonus payouts out of 2016 to 2017. The quick changes in revenue growth underline increased volatility and uncertainty in revenue streams. Overall, state governments have been hit harder by slowing tax revenue growth than local governments. Some state and local governments — particularly those that rely heavily on sales taxes or income taxes, as some large cities do — and local governments in oil-producing states are likely to be faring much worse than average.

As we’ve written, Washington has enjoyed extraordinary economic growth, primarily driven by the continued strength of the metro Seattle economy. So, the generalizations about “the states” often do not apply. But the Rockefeller Institute’s comments on federal tax reform are worth considering.

As for fiscal 2018, revenue forecasts are subject to uncertainty due to factors related to federal tax policy changes, the extent and timing of Federal Reserve interest rate increases, and nonwage income tax recovery, among others. The uncertainty tied to federal policy changes put state forecasters in a tough position and quite understandably makes it harder to forecast state revenues with any precision.

States will need to worry about at least three kinds of effects from federal tax reform, all of which are highly uncertain at this point: (1) the impact of tax reform on the economy; (2) the direct impact of tax reform on state government tax bases in cases where states conform to federal tax law; and (3) indirect impacts on state tax revenue as taxpayers change their behavior in anticipation of, and in response to, federal tax reform. While the federal tax reform bill has not been enacted yet, we believe that taxpayers have already taken actions and shifted part of their taxable capital gains from 2016 to 2017. The large declines in estimated and final payments is a clear indication that some wealthy taxpayers had decelerated income.

As a state without a personal income tax linked to federal tax law or a capital gains tax, Washington may be less directly affected than other states. Stuff to watch.