Five Facts About the Economy and Deficit Fact 2: People Aren't Buying Real Estate
The boom and bust of the real estate market in recent years has had a significant impact on the Washington State budget. The extreme volatility of the real estate market in recent years has given a relatively small tax—the real estate excise tax (REET)—a disproportionate role in the state fiscal situation.
When the current budget was passed, a precipitous drop in revenue from the REET was expected and built into budget projections. The real estate market further deteriorated, however, and it became clear that the pessimistic projection had been overly optimistic.
The graph below shows the REET as a share of general fund revenue from 2003 to 2007 and the current projections for 2008 through 2011. From 2003 to 2007, revenue from the REET grew quickly alongside the booming real estate market, moving from 4.4% of general fund revenue to 7.4%. The real estate bust has had the opposite effect. The REET is expected to raise $560 million less in 2009 that it did in 2007.
As I pointed out yesterday, the total amount of general fund revenue in the 2007-09 and 2009-11 biennia has fallen by $2.7 billion since the current budget was passed. Declining retail sales tax revenue explains 68% of that change. Declining REET expectations are the second largest factor, explaining 19%.
The direct effect of the real estate slump on state revenue isn’t limited to the REET, however. While autos are the most significant factor in declining retail sales, sales in real estate-related industries such as home furnishings, building materials, and specialty contractors have also fallen dramatically.
There has also been a direct impact on employment. The Economic and Revenue Forecast Council (ERFC) projects that construction employment will decline by 12% between the fourth quarter of 2007 and the 1st quarter of 2010.
We’ll talk more about employment tomorrow in Fact 3: People Are Losing Their Jobs.