THE PUGET SOUND

ECONOMIC FORECASTER

The Great Depression and theGreat Recession: Two Peas in a Pod

Dick Conway

The Puget Sound Economic Forecaster

Conway Pedersen Economics, Inc.

www.economicforecaster.com

THE PUGET SOUND

ECONOMIC FORECASTER

U.S. Real Gross Domestic Product

2000 2002 2004 2006 2008 20100.600

0.700

0.800

0.900

1.000

1.100

1.200

1.300

2000-2011 1929-1940

Initial Year =1.000

1929 1931 1933 1935 1937 1939

THE PUGET SOUND

ECONOMIC FORECASTER

Lessons from Decades of Forecasting

Dick Conway

The Puget Sound Economic Forecaster

Conway Pedersen Economics, Inc.

www.economicforecaster.com

THE PUGET SOUND

ECONOMIC FORECASTER

Forecasting Lessons

• Forecasts are bound to be wrong, at least to a degree.

Charles Tiebout

• Forecasters cannot promise accurate predictions, only reasonable ones.

Dick Conway, Jr.

• Be brave.

Dick Conway, Sr.

THE PUGET SOUND

ECONOMIC FORECASTER

A Forecaster’s Case for Tax Reform

Dick Conway

The Puget Sound Economic Forecaster

Conway Pedersen Economics, Inc.

www.economicforecaster.com

THE PUGET SOUND

ECONOMIC FORECASTER

TaxRevenue Percent

Retail sales and use 7,225.9 49.8

Business and occupation 3,126.021.6

Property 1,879.4 13.0

Other 2,266.1 15.6

Total 14,497.4 100.0

Washington State Government General Fund Tax Revenue, FY 2012

Millions of Dollars

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ECONOMIC FORECASTER

Characteristics of Tax Systems

WashingtonGrade

• Fairness F

• Stability D

• Transparency D

• Adequacy F

• Vitality D

THE PUGET SOUND

ECONOMIC FORECASTER

Tax Personal PercentRevenue Income of Income

1970 91.3 838.6 10.91980 230.0 2,301.5 10.01990 519.1 4,846.7 10.72000 893.2 8,559.4 10.42011 1,360.8 12,947.3 10.5

Average (1970-11) --- --- 10.7High (1972) 115.6 992.6 11.6Low (1982) 273.2 2,766.8 9.9

U.S. State and Local Government Tax Revenue, 1970-2011

Billions of Dollars

THE PUGET SOUND

ECONOMIC FORECASTER

Washington Washington U.S. StateState and Local State and LocalGovernment Government Government

FY 1995 11.6 8.0 10.9FY 2000 10.0 6.7 10.6FY 2005 10.0 6.5 10.8FY 2006 10.4 6.8 11.1FY 2007 10.5 6.8 11.1FY 2008 10.1 6.3 10.8FY 2009 9.5 5.8 10.5FY 2010 9.6 5.8 10.6

Washington and U.S. State and LocalGovernment Tax Revenue, FY 1995-FY 2010

Percent of Personal Income

THE PUGET SOUND

ECONOMIC FORECASTER

Actual Tax Revenue Gap Revenue GapRevenue Normal Tax Rate U.S. Tax Rate

FY 1995 14.8 1.2 0.9FY 2000 18.7 -1.3 -1.1FY 2005 23.0 -1.5 -1.6FY 2010 26.8 -3.0 -2.6FY2005-10 157.9 -11.0 -12.4

Note: The revenue gap under the normal tax rate is the difference between the tax revenue that would have been collected if the effective tax rate had been 10.7 percent (the “norm”) and the actual tax revenue. The U.S. tax rate is the current-year effective tax for all U.S. state and local governments.

Washington State and Local GovernmentTax Revenue Gap, FY 1995-FY 2010

Billions of Dollars

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ECONOMIC FORECASTER

PercentFY 2007 FY 2012 Change

State tax revenue 14.2 14.5 2.3Personal income 261.6 305.9 16.9Effective tax rate (%) 5.4 4.7 -12.6

State tax revenue 14.2 14.5 2.3State and local deflator (05=1.000) 1.081 1.254 16.0Population (thous.) 6,416.2 6,860.1 6.9Real per capita tax revenue ($05) 2,044 1,686 -17.5

Personal income 261.6 305.9 16.9Consumption deflator (05=1.000) 1.040 1.149 10.5Population (thous.) 6,416.2 6,860.1 6.9Real per capita income ($05) 39,204 38,809 -1.0

Washington State Government General Fund Tax Revenue, FY 2007-FY 2012

Billions of Dollars

THE PUGET SOUND

ECONOMIC FORECASTER

Puget Sound Taxable Retail Sales

1990

1995

2000

2005

2010

2015

30

40

50

60

70

80

30

35

40

45

50

55

Taxable retail sales (l) Percent of income (r)

Billions of Dollars Percent

THE PUGET SOUND

ECONOMIC FORECASTER

Personal Unemploy- HousingIncomement Rate Permits(bils $) (%) (thous.)

FY 2012 306.6 8.63 24.3FY 2015 353.6 7.37 34.2Percent change 15.3 -15.6 40.7

Model: ∆sales = 0.802∆income - 0.119∆unrt + 0.026∆hs (14.6) (-5.5) (3.1)

Prediction: ∆sales = 0.802(15.3) - 0.119(-15.6) + 0.026(40.7) = 12.3 + 1.9 + 1.1 = 15.3

ERFC prediction: ∆sales = 15.3

Washington Taxable Retail SalesModel and Forecast

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ECONOMIC FORECASTER

Tax Policy Options

• Maintain the current tax bases and tax rates, causing a further decline in the adequacy of state and local tax revenue.

• Expand the tax bases and raise the tax rates, exacerbating the unfairness of the tax system.

• Introduce an income tax, reduce the sales tax, and eliminate the business and occupation tax to increase the fairness, stability, transparency, adequacy, and vitality of the tax system.