2013 Sales Tax Revenue Forecasts

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Assumptions and Methodology

Background

On July 20th, 2011, the Chief Economist of King County presented forecasts of sales tax revenues to the Forecast Council. They were adopted by the Forecast Council and will be used to construct a balanced budget for 2012. The purpose of this document is to provide transparency to users of the forecasts, both inside and outside of County government.

Assumptions Mandated by the Forecast Council

All forecasts have been constructed under the following assumptions mandated by the Forecast Council. Taken together, these assumptions make the forecasts on the conservative (low) side.

• The forecasts are constructed with a 65% level of confidence. This means that there is a 65% chance that actual revenues will exceed forecasted, and only a 35% chance that actual will fall below forecasted. This is more conservative than an “expected value” forecast, which would be at the 50% confidence level.
• All proposed annexations from King County to incorporated cities are assumed to occur as scheduled through 2015. Some of the annexations may not occur or may occur later than assumed as they are still subject to voter approval.
• No changes to the tax code are assumed. Rates that are on the books as of this date are assumed to stay fixed throughout the forecast horizon.

Chief Economist’s Assumptions for Sales Tax Revenues

Sales and use tax revenues are collected by the Washington State Department of Revenue (DOR) each month and dispersed to King County two months later. DOR does not give the County a single lump sum, but rather several sums targeted to particular revenue categories and uses. The formulas used to calculate these revenues vary by category and are complex for some categories. Consequently, our approach is to use an econometric model to forecast the sales tax base, which includes all retail sales and other taxable activity, and then use the appropriate formulas to create forecasts of revenues by category stemming from the same tax base forecast.

Table 1 shows the formulas for the revenue categories that are relevant to the King County budget. The revenues for the General Fund, Children & Family Services, and Criminal Justice categories are affected by the division of the County into incorporated cities and unincorporated areas. The forecasts for these categories take into account several planned annexations of unincorporated areas into incorporated cities.

Forecasts of the Sales & Use Tax Base

Retail sales in King County are the largest portion of the sales and use tax base. Retail sales are directly tied to the health of the King County economy, which in turn is tied to the health of the national economy. Consequently, sales tax revenues have been affected by the recent recession, resulting in a sharp drop over the past two years. We employ a diverse range of national, state and local forecasts from three professional services to forecast the path of sales tax revenue recovery:

• Retail Sales – US – baseline forecasts from Global Insight
• Retail Sales – US – pessimistic forecasts from Global Insight
• Retail Sales – US – optimistic forecasts from Global Insight
• Rate of Unemployment – US – baseline forecasts from Global Insight
• Rate of Unemployment – US – pessimistic forecasts from Global Insight
• Rate of Unemployment – US – optimistic forecasts from Global Insight
• Retail Sales – King County – forecasts from Puget Sound Economic Forecaster (PSEF)
• Personal Income – King County – forecasts from PSEF
• Rate of Unemployment – King County – forecasts from PSEF
• CPI Inflation – Seattle – forecasts from the State Economic & Revenue Forecast Council (ERFC)
• Rate of Unemployment – Washington – forecasts from ERFC
• Sales Tax Revenue – Washington – forecasts from ERFC

Retail sales, personal income and inflation are positively correlated with the King County sales and use tax base; and the rate of unemployment is negatively correlated. Table 2 shows the history and forecasts for 2000-2015. The year 2011 is a partial forecast: as of July 20, January through April tax receipts had been reported to the County, showing a bump of 11% compared to the same months in 2010. Our 65% confidence forecast for 2011 takes that into account.

In spite of the weak start this year, we are forecasting a turnaround in retail sales in 2011 starting with the holiday season. We expect more than a 4% increase in retail sales in King County in 2011. However, it will be 2013 or 2014 before the dollar value of retail sales are back up to the pre-recession levels of 2007, and much of that will be inflation.

Table 1 shows that the General Fund, Children & Family Services and Criminal Justice categories are all affected by the jurisdictional split of King County into incorporated cities and unincorporated areas. The County’s share of the sales tax from unincorporated areas is higher because the County’s responsibilities are greater in those areas. Consequently, planned annexations of some unincorporated urban areas into incorporated cities will reduce the County’s share of sales tax revenues according to the formulas in Table 1. These reductions are reflected in the forecasts; the assumption is that the full impact of an annexation on sales tax revenues will not be felt until the year after annexation.