Are Local Government Revenues Lagging Behind the Economy?

Using past recessions as a guide, the rule of thumb is that the recovery in local government revenues will lag 18 to 24 months behind the low point of a recession. This is a national average, where the long lag is primarily attributable to the timing of property tax assessments and collections. In Washington, the lag time for general fund revenue recovery should be shorter—closer to six months—because our system of property tax levies allows for relative stability of those revenues through a recession, at least for senior taxing districts (see below). Sales tax revenues typically lag only a few months behind an uptick in the economy.

The National Bureau of Economic Research dated the Great Recession from December 2007 to June 2009. So, if we are four years past the recessionary trough, why haven’t local government revenues consistently recovered to their pre-recessionary position?

Sales Tax Revenues

As the King County Economic and Revenue Forecast notes, sales tax revenues are largely driven by income, inflation, and employment. When those factors rise, sales tax receipts increase. As the recovery has sputtered along, so have sales tax revenues. And the slowly rising tide has not lifted all boats. Sales tax revenues are recovering nicely in some communities, while others are still stuck in the doldrums. Revenue forecasters for King County project that it will be 2015 or 2016 before the dollar value of retail sales are back up to the pre-recession levels of 2007.

Local governments would enjoy a modest boost to sales tax revenues with the passage and implementation of the Marketplace Fairness Act (MFA), also known as the “Internet Sales Tax Act.” MFA has passed the U.S. Senate and awaits consideration by the U.S. House. The Washington State Department of Revenue has put together an estimate of State and Local Sales Tax Gain, assuming a January 1, 2014, effective date of the MFA.  The estimate assumes 5 months of cash collections for FY 2014 and 12 months thereafter. Local governments would collect an additional $27.3 million in 2014, increasing to $158.5 million in 2017. Over that time period, business compliance with MFA’s requirements is expected to rise from 50% to 90%.

Property Tax Revenues

Washington’s property tax system is budget based. We establish a tax rate that will raise the amount in the budget. This generally protects senior taxing districts (i.e. cities and counties) from experiencing unbudgeted decreases in property tax revenues. For example, if your Assessed Value (AV) has fallen by two percent and the budget calls for stable property tax receipts , the assessor will increase your rate by two percent (assuming that does not put you over the statutory limit) to maintain the amount of your levy. As AV declines, then taxing districts (particularly junior taxing districts) could be in danger of bumping up against the statutory limits for levy rates. With a few exceptions, the aggregate regular levy rates of senior and junior taxing districts cannot exceed $5.90 within the boundaries of any city or county.

The good news is that rising home values in Washington should relieve some cap pressure that junior taxing districts have been experiencing. The latest real estate data show a 7.8% increase in housing prices in Washington State, year over year from April 2012 to April 2013.

So, it appears that local government revenues are not lagging behind the economy any more than in previous recessions. The real problem is that the economic recovery is grinding along at a frustratingly slow pace. Watch for MRSC’s new edition of Budget Suggestions, coming out next month, for tips on how to prepare a solid revenue projection in this time of continuing uncertainty.