Local Government Partnership Meeting June 8, 2009

1. Local Government Partnership Meeting June 8, 2009

2. Welcome and Introductions Cindi Holmstrom, DirectorDepartment of Revenue

3. Announcements & Housekeeping Items Miki Gearhart, Local Government Partnership Facilitator

4. 2009 Legislative SessionDrew Shirk, Legislative LiaisonLegislation and Policy Division • SB 5511 City-County Assistance Distribution • SSB 5571 E-file/E-pay • ESHB 2075 Digital Products • SB 6173 Seller’s Permit • ESSB 6170 Environmental Tax Incentives

5. Economic and Revenue OutlookPresented toDOR Local Government Partnership Eric Swenson Senior Economic Forecaster June 8, 2009 Olympia, Washington

6. Summary • We expect the recession will trough in the 3rd quarter, followed by weak growth until mid-2010 • Our current outlook is modestly weaker than in March • Washington’s economy will recover at the same time as the nation • Job losses in the state are expected to continue through the end of 2009 • The unemployment rate is expected to continue to rise into 2010 • Excluding property tax, collections to date are about 7 percent below our March forecast.

7. Housing bubble bursts - sub-prime mortgage defaults trigger a credit crisis, bear market Economy in recession – job losses; consumer and business spending falls Recession trough in sight – rate of decline in activity slows or levels off, equity markets recover, initial jobless claims peak Recession trough – expected in Q3; activity turns around, but job losses continue Slow recovery – job losses level off, but the unemployment rate keeps rising; housing will be late to recover We are here The recession trough is in sight State Revenues will recover only after the economic recovery gains traction -some time in the first half of 2010 Recession trough in sight – rate of decline in activity slows or levels off, equity markets recover, initial jobless claims peak

8. Bank lending to businesses and consumers is easing Source: Federal Reserve Board, Senior Loan Officers Quarterly Survey, data through April 2009 survey

9. Corporate bond issuance volume is recovering Y-T-D issuance is 50% higher than year ago, and 5 times what it was in the last four months of 2008 Source: SIFMA, data through April 2009

10. The S&P 500 typically turns up two quarters prior to the recession trough For each recession, the S&P 500 index has been normalized to 1 at the recession trough Quarters Prior Recession Trough Quarters After Source: S&P, NBER, ERFC

11. Consumer confidence is improving Both the Conference Board and University of Michigan indexes seem to have bottomed out in February. Source: University of Michigan; Conference Board, data through May 2009.

12. Initial jobless claims appear to have peaked Initial jobless claims appear to have peaked in late February for Washington and mid-March for the U.S. Source: ESD, ERFC, data through May 2009

13. Housing starts have stopped declining The level of housing starts has been relatively stable since February.

14. Automotive sales have stabilized at around 9 million, annualized Source: Autodata Corporation; data through May 2009

15. The U.S. Real GDP forecast shows a mildly slower recovery than in March U.S. Real GDP Source: Bureau of Economic Analysis, ERFC

16. The recovery in WA personal income growth is expected to match the nation’s Source: ERFC June 2009 preliminary forecast; actual data through 2008Q4

17. The outlook for personal income growth is weaker in the near term WA nominal personal income growth Source: Bureau of Economic Analysis, ERFC

18. WA employment lagged the nation in the downturn, but will recover at about the same rate as the nation Source: ERFC June 2009 forecast, actual through April 2009

19. Year-over-year Revenue Act declines are the steepest on record Collections adjusted for new legislation and special factors Source: ERFC

20. The gap between income and taxable activity has widened * Adjusted for new legislation and special factors Source: ERFC

21. Revenue growth relative to income continues to drop * Adjusted for new legislation and special factors Source: ERFC; data through 2009Q1

22. The decline in taxable retail sales steepened in the fourth quarter The decline in non-retail trade caught up to the decline in retail trade in the fourth quarter. Retail trade represented 43.6 percent of taxable activity in the fourth quarter of 2008.

23. Most of the decline in taxable retail sales was due to autos Source: ERFC; data through 2008Q4

24. WA motor vehicle sales have yet to level off Source: WA State DOL, Data through April 2009

25. B&O activity "fell off a cliff" in the fourth quarter Source: ERFC; data through 2008Q4

26. WA single family building permits are showing signs of stabilization Source: U.S. Census, Data through April 2009

27. The outlook for housing is weaker WA housing permits Source: Bureau of Economic Analysis, ERFC

28. Is the decline in Real Estate Excise Tax coming to an end? WA Taxable REET Activity, SA Source: ERFC, data through May 2009

29. REET improvement is likely to come from more transactions, not value *Taxable activity divided by the total number of transactions. Activity based on real estate excise tax paid at closing. Source: ERFC, data through March 2009

30. March 2009 General Fund Forecast by Fiscal Year In the March forecast, fiscal year General Fund revenue was expected to still be below the fiscal 2008 level at the end of the next biennium. 6.6% 1.9% (8.3%) Source: ERFC forecast, March 2009

31. Conclusion • The economy is still likely to bottom out at the same time as we had estimated in March, but at a lower level of activity • Washington’s economy is well positioned to recover at the same time as the nation • The recovery in state revenues will lag the recovery in activity • Stay tuned for our next revenue forecast on June 18th.

32. Questions Economic & Revenue Forecast Council 1025 E. Union Avenue, Suite 544 Olympia WA 98504-0912 www.erfc.wa.gov 360-570-6100

33. Impact of the Economy on Property Tax Levies Valerie L. Torres DOR Research Division

34. Property Tax – Regular Levies • Past levy + additions Additions: • Limit factor (aka – “one percent” or “101 percent”) • New construction, improvements, wind turbines • Change in state-assessed properties

35. Limit Factor • Taxing district with population < 10,000 • 101 percent (additional 1 percent) • Taxing district with population > 10,000 • The lesser of • 101 percent • 100 percent + “inflation” Inflation: Percentage change in the Implicit Price Deflator (IPD)

36. History of Inflation

37. Percentage Change in the IPD • In March 2009 the Washington Economic Revenue and Forecast Council predicted a negative percentage change in the IPD. • What happens with a negative IPD? Limit Factor = 100% + (-1.00%) = 99% • Levies would not grow! • Taxing districts with a population of more than 10,000 could increase the limit factor to 101 percent with a finding of substantial need. • Any taxing district can exceed the limit factor with the approval of a majority of the voters (lid lift).

38. Rate = Levy / Value • Levies are fairly constant. • So when the levy is constant, if the value increases, then the rate decreases. • Similarly, if the value decreases, then the rate increases. • In March 2009 the Washington Economic Revenue and Forecast Council predicted a negative percentage change in market value.

39. Market Value

40. If Market Value Declines … • Most taxing districts will not be impacted. • However, taxing districts which have both • A levy rate close to the statutory maximum rate and • A value decline • Could have a levy limited by the statutory maximum rate.

41. State Levy Collections

42. Statewide Property Tax Collections • Decrease in collections for the year • After a year or two the percentage of the current roll increases, usually to over 100 percent, indicating the payment of back taxes.

43. Available Sources of Data • Property Tax Special Notice • “Determining the Limit Factor for Increases in Property Tax Levies,” Issued April 22, 2009 • Property Tax Statistics • Department of Revenue web site, under “About Us,” under “Get Statistics and Reports” • Statistics for taxes due in 2009 available in September.

44. 2009 Property Tax LegislationDavid Saavedra, Property Tax Division

45. E2SHB 1208 – Property tax administration • HB 1295 – Relating to agricultural fairs • 2SHB 1484 – Relating to habitat open space • HB 1619 – School levies used for M & O (maintenance and operation) • SHB 1733 – Relating to the property tax current use valuation programs • EHB 1815– Relating to current use valuation under the farm and agricultural land classification • HB 2331 – Increases document recording fees from $10 to $30. • 2SSB 5045 – Regarding community revitalization financing • SB 5355– Regarding initial levy rates for rural county library districts. • SSB 5368 – Relating to making provisions for all counties to value property annually for property tax purposes • SSB 5401 – Relating to habitat open space • SB 5426 – Annexation to a fire district. • 2SSB 5433 – Relating to modifying provisions of local option taxes • SB 5680 – Relating to the property tax exemption for non profit artistic, scientific, historical, and performing arts organizations • E2SSB 5688 – Further expanding the rights and responsibilities of state registered domestic partners • ESSB 5901 – Relating to modifying provisions of the local infrastructure financing tool program

46. The Leasehold Excise Tax and Tenant Refunds Stuart ThronsonAssistant Director, Special Programs

47. For Today… • Leasehold Excise Tax Overview • RCW 82.29A.120 – Allowable Credit • Current use of the Credit and why it’s important • Causes • How you can help get the right answer • What DOR can do to help

48. The Leasehold Excise Tax • An excise tax on the private lease of public property (82.29A RCW) • In lieu of Property Tax • Levied on contract rent • Current rate is 12.84% • 6% is county and city • 6.84% is state • Collected and reported to DOR by the lessor

49. RCW 82.29A.120 – Allowable Credit 1) With respect to a leasehold interest … there shall be allowed a credit against the tax as otherwise computed equal to the amount, if any, that such tax exceeds the property tax that would apply to such leased property ... if it were privately owned by the lessee…

50. Current use of the Credit • Tenants notify DOR or the public lessor and request a refund of overpaid LET. • DOR makes a determination of whether LET has been overpaid. • We research the value of the property as shown by the County Assessor and calculate the property tax. • DOR than issues a refund and adjusts the local LET distribution to reflect the local’s portion of the refund.