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

1. 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

2. U.S. Real Gross Domestic Product

3. Lessons from Decades of Forecasting Dick Conway The Puget Sound Economic Forecaster Conway Pedersen Economics, Inc. www.economicforecaster.com

4. 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.

5. A Forecaster’s Case for Tax Reform Dick Conway The Puget Sound Economic Forecaster Conway Pedersen Economics, Inc. www.economicforecaster.com

6. Washington State Government General Fund Tax Revenue, FY 2012Millions of Dollars Tax Revenue Percent Retail sales and use 7,225.9 49.8 Business and occupation 3,126.0 21.6 Property 1,879.4 13.0 Other 2,266.1 15.6 Total 14,497.4 100.0

7. Characteristics of Tax Systems Washington Grade • Fairness F • Stability D • Transparency D • Adequacy F • Vitality D

8. U.S. State and Local Government Tax Revenue, 1970-2011Billions of Dollars Tax Personal Percent Revenue Income of Income 1970 91.3 838.6 10.9 1980 230.0 2,301.5 10.0 1990 519.1 4,846.7 10.7 2000 893.2 8,559.4 10.4 2011 1,360.8 12,947.3 10.5 Average (1970-11) --- --- 10.7 High (1972) 115.6 992.6 11.6 Low (1982) 273.2 2,766.8 9.9

9. Washington and U.S. State and LocalGovernment Tax Revenue, FY 1995-FY 2010Percent of Personal Income Washington Washington U.S. State State and Local State and Local Government GovernmentGovernment FY 1995 11.6 8.0 10.9 FY 2000 10.0 6.7 10.6 FY 2005 10.0 6.5 10.8 FY 2006 10.4 6.8 11.1 FY 2007 10.5 6.8 11.1 FY 2008 10.1 6.3 10.8 FY 2009 9.5 5.8 10.5 FY 2010 9.6 5.8 10.6

10. Washington State and Local GovernmentTax Revenue Gap, FY 1995-FY 2010Billions of Dollars Actual Tax Revenue Gap Revenue Gap Revenue Normal Tax Rate U.S. Tax Rate FY 1995 14.8 1.2 0.9 FY 2000 18.7 -1.3 -1.1 FY 2005 23.0 -1.5 -1.6 FY 2010 26.8 -3.0 -2.6 FY2005-10 157.9 -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.

11. Washington State Government General Fund Tax Revenue, FY 2007-FY 2012Billions of Dollars Percent FY 2007 FY 2012 Change State tax revenue 14.2 14.5 2.3 Personal income 261.6 305.9 16.9 Effective tax rate (%) 5.4 4.7 -12.6 State tax revenue 14.2 14.5 2.3 State and local deflator (05=1.000) 1.081 1.254 16.0 Population (thous.) 6,416.2 6,860.1 6.9 Real per capita tax revenue ($05) 2,044 1,686 -17.5 Personal income 261.6 305.9 16.9 Consumption deflator (05=1.000) 1.040 1.149 10.5 Population (thous.) 6,416.2 6,860.1 6.9 Real per capita income ($05) 39,204 38,809 -1.0

12. Puget Sound Taxable Retail Sales

13. Washington Taxable Retail SalesModel and Forecast Personal Unemploy- Housing Income ment Rate Permits (bils $) (%) (thous.) FY 2012 306.6 8.63 24.3 FY 2015 353.6 7.37 34.2 Percent 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

14. 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.