Five Facts About the Economy and the Deficit Fact 1: People Aren't Buying Stuff

The Washington State budget relies heavily on the retail sales tax. When people buy less stuff, the state collects less revenue. Much of our current deficit problem can be attributed to the precipitous drop in retail sales tax revenue over the last year.

The graph below shows taxable retail sales for each quarter from the first quarter of 2007 through the second quarter of 2008. The percentages are the change in sales from the same quarter in the previous year. At the beginning of 2007, sales were growing by 8% year-over-year. During the last half of 2007, they were growing by less than 6%. By the second quarter of 2008, sales were falling by 2%.

The Department of Revenue will be releasing data for the third quarter of 2008 in a few weeks, but it’s a safe bet that sales have continued to fall. The Economic and Revenue Forecast Council (ERFC) expects that taxable retail sales will be lower in fiscal year 2009 than the prior year. That’s only happened twice in recent history: in 1984 and 2002. The current decrease is expected to be deeper than the two previous times.

The recession has hurt some industries more than others. The graph below shows taxable retail sales at auto dealers. Sales of automobiles, which make up about 8-9% of total sales, have plummeted.

Remember a year ago, when we were worried about a $2.4 billion deficit for the 2009-11 budget? It’s more than doubled since then to become the largest deficit since 1981-83.

Most of the difference between the deficit expected last spring and the current projection is due to reduced revenue expectations. The total amount of general fund revenue expected in the two biennia has fallen by $2.7 billion since the current budget was passed. Sixty-eight percent of the difference is from falling retail sales tax revenue.

Another important factor is the real estate excise tax. More on that tomorrow in Fact 2: People Aren’t Buying Real Estate.