From the Director: City Budget Caution: State Revenue Collections Fall More than Expected

The October 10 Revenue Collection Report contains chilling news for cities, the state and other local governments. Revenues continue to come in lower than conservative forecasts.

AWC hopes the following information is helpful as the city budget process unfolds. Please note that this information is based on statewide trends, sales activity in your particular city will differ.

The Revenue Collection Report reveals:

• Retail sales tax: sales tax revenue from the retail trade sector (retail goods such as automobiles, furniture, electronic goods, etc.) declined 7.3% from this period in September, 2007. Collections from the retail trade sector have declined year-over-year in eight of the last nine months. Overall, this is the largest decline in sales tax collections since the 2001 recession.
• Sector information: certain retail trade sectors are declining more rapidly than others. The sectors with the largest declines were motor vehicle dealers (-18.4%), furniture stores (-13.8%), building materials/garden supply retailers (-12.5%), food and beverage stores (-6.9%) and electronics and appliances stores (-5.6%).
• Construction: the construction sector reported an 8.8 percent decrease in tax payments this month.
• Real estate excise tax (REET): REET revenue declined 30.2% from this period in September, 2007 . Taxable real estate activity has declined 21 of the last 23 months on a year-over-year basis. The decline is both in the number of transactions and in the value of each transaction as home prices fall.

What is the Bottom Line for Your Budget?

All indications are that the nation and the state are entering a recession. No one can predict the extent or duration of the recession, however it is anticipated that the decline in the retail trade will continue through the next two calendar quarters, mimicking the 2001 recession. . It is highly likely that your sales tax revenue for 2009 will be equal to or less than your collections in 2008.

As it did in 2001, DOR is beginning to see increased late and delinquent taxpayers, as well as, more closed accounts as businesses shut down. This may increase the volatility of your revenues.

REET collections statewide are at 2004 collection levels and will likely remain at that level in 2009. Again, the activity within your city may differ, but this trend is evident throughout the state.

To date, the ups and downs of the stock market have not taken a significant toll on the state’s investment fund, which invests pension and industrial insurance funds. However, if the market continues to decline, rate increases may be on the table.

Streamlined Sales Tax Considerations

A year and a half ago when the Streamlined Sales Tax (SST) bill passed, no one could have predicted the law would go into effect during such a significant economic downturn. We have heard from many cities that experienced a recent reduction in sales tax distributions and are anxious to know what portion of the decrease is due to the economic downturn and what portion is attributable to SST.

Unfortunately, this information won’t be known until DOR is able to provide cities with data in December when mitigation payments are sent. Cities that were negatively impacted because of the change to destination-based sales tax during July, August and September will receive a mitigation payment before the end of December. Cities that have a signed secrecy clause filed with DOR will receive detailed information with the mitigation payment.

It is important to remember that as the national economic crisis looms people are not buying big ticket items (furniture, building materials, electronics, appliances, etc). Traditionally, many of these items are delivered and subject to new sourcing rules. Therefore, cities that expected to see additional revenues as a result of SST may not experience the full impact until sales pick up again.

City-County Assistance Account Impacted

The economic decline will also impact cities that receive distributions from the City-County Assistance Account (6050 funding). The decline in REET means that the total amount of funds to be distributed will be at its lowest level ever. As noted in last month’s Bulletin October cumulative distributions from this account to 173 eligible cities were 25 percent less than in 2007 and 48 percent less than in 2006.

AWC will meet with DOR in early November to further discuss projections for REET collections and how this may impact cities receiving distributions from the assistance account.

Additional Forecast Council Information

Cities can find the October 10 Revenue Collection Report on the Economic and Revenue Forecast Council’s website: www.erfc.wa.gov.

To receive future reminders for this summarized report and other Forecast Council updates, you can sign up for the Forecast Council’s list serve:http://listserv.wa.gov/cgi-bin/wa?SUBED1=ofcupdates&A=1.

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