post-election economic and revenue outlook · post-election economic and revenue outlook terry...

POST-ELECTION ECONOMIC AND REVENUE OUTLOOK

Terry Rephann Center for Economic and Policy Studies

Thomas Jefferson Planning District Public Service Training Program December 13, 2012

Outlook Outline • National Economic Trends

• Planning District Recent Economic Performance

• Planning District Tax Revenue Trends

• The Fiscal Cliff • State Fiscal Cliff Impacts • Planning District Fiscal Cliff Impacts

• Conclusions

National Economic Trends

Gross Domestic Product Components

• Gross Domestic Product (GDP). Total Value of Goods and Services Produced in the United States

• GDP=C+I+G+(X-M) •  C= Personal Consumption •  I=Investment •  G=Government Expenditures •  X-M= Net Exports

Expenditures

-5 0 5 10

Personal Consumption

Investment

Government

Exports

Imports

Trillions ($)

Components of GDP Growth

-10

-8

-6

-4

-2

0

2

4

6

-10

-8

-6

-4

-2

0

2

4

6

2007 2008 2009 2010 2011 2012

Personal consumption

Structures

Equipment and software

Residential

Inventories

Net exports

National defense

Nondefense

State and local

GDP Source: Bureau of Economic Analysis

Contribution of Residential Investment to GDP Growth

-2

-1.5

-1

-0.5

0

0.5

1

2007 2008 2009 2010 2011 2012

Source: Bureau of Economic Analysis

Contribution of Federal Government Expenditures to GDP Growth

-1

-0.5

0

0.5

1

1.5

2007 2008 2009 2010 2011 2012


Contribution of Personal Consumption Expenditures to GDP Growth

-4

-3

-2

-1

0

1

2

3

2007 2008 2009 2010 2011 2012


Federal Reserve Assets

0

0.5

1

1.5

2

2.5

3

3.5

2007 2008 2009 2010 2011 2012

Trill

ions

($)

Other

Support for Specific Institutions All Liquidity Facilities

Securities Held Outright

Source: Federal Reserve

Treasury Yields and Consumer Interest Rates

0

2

4

6

8

10

12

14

16

18

1982

19

83

1985

19

87

1988

19

90

1992

19

93

1995

19

97

1998

20

00

2002

20

03

2005

20

07

2008

20

10

2012

3-month Treasury

10-year Treasury

30-year Home Mortgage 48-month Auto Loan

Private Balance Sheet Repair • Household debt has decreased • Debt payoff • Defaults

• Asset values have increased • Real Estate is no longer

a drain on wealth • Stock and bond markets

have been relatively buoyant

Public Balance Sheet Disrepair • Absent Major Reforms,

Federal Debt reaches 90 percent of GDP in 2021 •  Reinhart and Rogoff (2011).

Above 90 percent, median growth roughly 1 percent lower; average growth almost 4 percent lower

•  Federal Debt reaches 100 percent of GDP in 2024

• Budget Control Act of 2011 (Sequestration) alone doesn’t control the debt

Federal Debt as % of GDP without Changes

0 20 40 60 80

100 120 140 160 180 200

2000

20

04

2008

20

12

2016

20

20

2024

20

28

2032

20

36

Allow Fiscal Cliff

Suspend Fiscal Cliff

Source: Congressional Budget Office

Thomas Jefferson Planning District Recent Performance

Employment Growth

Source: Bureau of Labor Statistics, Current Employment Statistics (last point Oct. 12/Oct. 11 )

% Charlottesville MSA trough not as deep. Rebound is similar to state and nation.

-5 -4 -3 -2 -1 0 1 2 3 4 5

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

United States Virginia Charlottesville MSA

Unemployment Rate

Source: Bureau of Labor Statistics (last point in October 2012)

% TJPD unemployment rate spread with Virginia has grown in recovery.

0

2

4

6

8

10

12

United States Virginia TJPD

Thomas Jefferson Planning District Unemployment and Poverty Rates

0

2

4

6

8

10

12

14

Povery Rate Unemployment Rate

Source: Bureau of Labor Statistics and U.S. Census Bureau

Population Growth

0 0.5

1 1.5

2 2.5

3 3.5

4 4.5

5

1970

19

72

1974

19

76

1978

19

80

1982

19

84

1986

19

88

1990

19

92

1994

19

96

1998

20

00

2002

20

04

2006

20

08

2010

TJPD Virginia U.S.

% change


Per Capita Income Compared to U.S

80

85

90

95

100

105

110

115

1969

19

71

1973

19

75

1977

19

79

1981

19

83

1985

19

87

1989

19

91

1993

19

95

1997

19

99

2001

20

03

2005

20

07

2009

20

11

Virginia TJPD


% of U.S.

Intraregional Per Capita Income Convergence

50

60

70

80

90

100

110

120

1969

19

72

1975

19

78

1981

19

84

1987

19

90

1993

19

96

1999

20

02

2005

20

08

2011

Albemarle & Charlottesville Fluvanna

Greene

Lousia

Nelson


% of U.S.

Retail Sales: Local Option Sales Tax

-10

-5

0

5

10

15

Jan-

01

Oct

-01

Jul-0

2 A

pr-0

3 Ja

n-04

O

ct-0

4 Ju

l-05

Apr

-06

Jan-

07

Oct

-07

Jul-0

8 A

pr-0

9 Ja

n-10

O

ct-1

0 Ju

l-11

Apr

-12

% 1

2 M

onth

Cha

nge

Virginia TJPD

Retail sales rebound.

Source: Virginia Department of Taxation, 12 month moving average

Building Permits % of 2000 Census single unit detached housing units . . . .

Source: U.S. Census Bureau (2012 estimated based on Jan.-Oct.)

0 0.5

1 1.5

2 2.5

3 3.5

4 4.5

1996

19

97

1998

19

99

2000

20

01

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

United States Virginia TJPD

Housing construction pickup not as pronounced as VA, US

Building Permits by Locality

0

500

1,000

1,500

2,000

2,500

1996

19

97

1998

19

99

2000

20

01

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

Other Louisa Greene Fluvanna Albemarle


Building Permits by Locality

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

100%

1996

19

97

1998

19

99

2000

20

01

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

Other Louisa Greene Fluvanna Albemarle


% of District Total

Housing Price Changes

Source: Federal Housing Finance Agency

% annual change

-10

-5

0

5

10

15

20

25

1984

19

85

1986

19

87

1988

19

89

1990

19

91

1992

19

93

1994

19

95

1996

19

97

1998

19

99

2000

20

01

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

United States Virginia Charlottesville MSA

Housing prices are stabilizing

TJPD Employment Change, 2006-2011

Source: Virginia Employment Commission

Source: Bureau of Economic Analysis *Size represents total employment

Economy is less diversified

Eds and Meds Economic Footprint • Eds and Meds

• Eds (higher education--2 year college and university)

• Meds (hospitals, ambulatory care, doctor’s offices, nursing homes, home health)

• Economic Footprint •  33,000 direct jobs •  52,000 total (direct,

indirect, and induced) •  52,000 economic

footprint/147,000 total jobs=35%

Thomas Jefferson Planning District Revenue Trends

Sources of TJPD Local Revenue, FY 2011

Sources of Local Government Revenue

Local 64%

State aid

28%

Federal aid 8%

Sources of Local Tax Revenue

Real property

61% Personal property

10%

Local sales and use

7%

Public service

corporation property

6%

Business license

4%

Restaurant meals

3%

All other 9%

Source: Virginia Auditor of Public Accounts

TJPD Sources of Local Government Revenue, FY 2001 to FY 2011

0

100

200

300

400

500

600

Local State aid Federal aid


TJPD Change in Sources of Local Government Revenue

-10

0

10

20

30

40

50

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Local State aid Federal aid Total

% change


TJPD Local Government Revenue from Taxes and Nontax Sources

0

50

100

150

200

250 20

00

2001

20

02

2003

20

04

2005

20

06

2007

20

08

2009

20

10

2011

Mill

ions

($)

Real property tax Personal property tax Other local tax Local nontax revenue


TJPD Local Government Revenue from Tax Sources

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

100%

2000

20

01

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

Other taxes Personal property tax Real property tax


TJPD Per Capita Local Tax Revenue in Constant Dollars

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800 20

00

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Albemarle Fluvanna Greene Louisa Nelson TJPD Virginia

4 year assessment cycle


TJPD Consumer Taxes

0

2

4

6

8

10

12

0

5

10

15

20

25

30

2000

20

01

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

Per

sona

l Inc

ome

(Bill

ions

$)

Tax

Rev

enue

(Mill

ions

$)

Hotel Motel

Restaurant and Food

Sales and Use

Personal Income

Source: Virginia Auditor of Public Accounts and Bureau of Economic Analysis

TJPD Consumer Tax Revenue and Personal Income Growth

-8 -6 -4 -2 0 2 4 6 8

10 12

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Tax Revenue (Sales and Use, Restaurant and Food) Personal Income

Source: Virginia Auditor of Public Accounts and Bureau of Economic Analysis

% change

The Fiscal Cliff

Components of Fiscal Cliff, FY 2013 •  “Fiscal Cliff” term coined

by Fed Chair Ben Bernanke

• Spending Decreases (1/5) •  Sequestration •  Expiration of Emergency

Unemployment Benefits •  “Doc Fix”

•  Tax Increases (4/5) •  “Bush Tax Cuts” (2001-2003) •  AMT (Alternative Minimum

Tax) expansion •  Tax Extenders Expiration •  Payroll Tax Increase •  Taxes in Affordable Care Act 0

100

200

300

400

500

600

Bill

ions

($)

Affordable Care Act

Other Taxes

Payroll Tax

Bush Tax Cuts and AMT

Doc Fix

Unemployment Insurance

Sequestration

Source: Congressional Budget Office (May)

Fiscal Cliff Hype versus Reality •  Many cuts/tax increases have

routinely been deferred (e.g., Doc Fix, AMT, “Tax Extenders”)

•  Fiscal Cliff type policies are already occurring •  The first phase of sequestration

imposed discretionary spending caps that began in FY12

•  Affordable Care Act spending decreases already implemented

•  Some components will be spread out throughout this fiscal year and next

•  Fiscal Cliff has already affected business activity •  Companies have been delaying or

decreasing business investment and hiring

“Sequestration” ($103 Billion) •  Budget Control Act (BCA) of

2011 •  Provided increases in debt limit

in return for budget caps and cuts later ($2.1 million savings).

•  Sum over 10 years is equal to debt limit increase.

•  Cuts divided evenly between between defense and nondefense.

•  Cuts needed because of failure of “Supercommittee”

•  Some expenditures are exempt (e.g. social security, most unemployment payments, veterans benefits, Medicaid)

$1.2 Trillion Sequester (2013-2021)

$984 Billion Sequester (split evenly over 9 years,

$109 bn/yr)

Defense Cuts

$492 bn

Lower Annual Discretionary

Funding $492 bn

Non-Defense Cuts $492 bn

Lower Annual Discretionary

Funding $322 bn

Medicare 2% Cut $116 bn

PPACA* Exchange Subsidy

Cuts $7 bn

Other Mandatory

Cuts $41 bn

Assumed Debt Service Savings

$216 bn

Breaking Down the Sequester

Unemployment Insurance Benefits ($26 Billion) • Emergency Unemployment Compensation (EUC) created by and American Recovery and Reinvestment Act (“Fiscal Stimulus”) •  Extended one year by The

Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010

•  Extended again by Middle Class Tax Relief and Job Creation Act of 2012

0 20 40 60 80

100 120 140 160

2000

20

02

2004

20

06

2008

20

10

2012

20

14

Bill

ions

($)

Emergency Benefits and Federal Additional Compensation Regular and Extended Benefits


Sustainable Growth Rate ($11 Billion) • Sustainable Growth Rate (SGR) “Doc Fix” •  Enacted by the Balanced

Budget Act of 1997 to control health care costs

•  Physician service costs are growing at twice the rate allowed by SGR

•  Medicare physician payment rates would be reduced by 27 percent.

•  Congress routinely cancels cuts

•  The adjustment becomes more expensive each time


Bush Tax Cuts and Alternative Minimum Tax (AMT) ($221 Billion) •  Economic Growth and Tax Relief

Reconciliation Act of 2001 and Jobs and Growth Tax Relief Reconciliation Act of 2003. •  Bush Tax Cuts were passed using

“reconciliation process”. They are subject to 10 year window imposed by Byrd Rule.

•  Cliff Components •  Raise individual income tax rates •  Raise tax rates on long-term capital

gains and dividends •  Reduce child tax credit and earned

income tax credit •  Lower estate threshold and raise tax

rate •  Extended 2 years by Tax Relief,

Unemployment Insurance Reauthorization, and Job Creation Act of 2010

Alternative Minimum Tax (AMT) •  AMT designed so high earners would

pay some minimum level of taxes •  Add back in tax preferences. Use basic

exemption and apply tax rate. Pay larger of regular income tax or AMT

•  Basic exemption not indexed for inflation. More taxpayers affected.

•  Basic exemption raised many years to avoid affecting more taxpayers

•  1997: 605,000 taxpayers (1% of all taxpayers)

•  2009: 3.8 million (2.7% of all taxpayers) •  2012: 34 million (20% of all taxpayers) •  2022: 58 million

•  AMT patch becomes more expensive over time

•  Repealing AMT without Bush tax cuts costs $1.3 trillion 2013-2022, with tax cuts $4.1 million

AMT Basic Exemption

$30,000 $35,000 $40,000 $45,000 $50,000 $55,000 $60,000 $65,000 $70,000 $75,000

1993

19

95

1997

19

99

2001

20

03

2005

20

07

2009

20

11

Married Unmarried

Source: Congressional Research Service

Payroll Tax Increase ($95 Billion) • Created by Tax Relief,

Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“Obama-GOP Tax Deal”) •  Reduced employee’s payroll

tax rate from 6.2% to 4.2% •  Lost SS Trust Fund revenue

made up with transfers from the general fund

• Extended to 2012 by The Middle Class Tax Relief and Job Creation Act of 2012

0

1

2

3

4

5

6

7

1937

19

43

1949

19

55

1961

19

67

1973

19

79

1985

19

91

1997

20

03

2009

Source: U.S. Social Security Administration

Other Expiring Tax Provisions ($65 billion)

•  Tax Extenders •  Individual deductions •  Business deductions and

credits (R&D, foreign source income, depreciation)

•  Charitable giving •  Energy •  Community Development •  Disaster Relief

• ARRA tax cuts •  American Opportunity Tax

credit

Number of Federal Tax Provisions Expiring

Source: American Enterprise Institute

0

50

100

150

200

250

Affordable Care Act Taxes ($18 Billion)

•  Budgetary stimulus effects vary over FY 2010-2019 period •  Early cuts in expenditures and

steady increase in revenues. •  Real spending impetus begins in

2014. •  2013 Provisions

•  0.9% increase in Medicare HI (hospital insurance) payroll tax for higher earners and 3.8 percent increase on investment income

•  2.3% excise tax on medical devices -40

-20

0

20

40

60

80

100

120

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Bill

ions

of $

Outlays Revenues Surplus

Source: Congressional Budget Office (2010)

What Effect will the Fiscal Cliff have in on the Economy in the Short Run? •  Fiscal contraction of this size (3-5% of GDP) is very

unusual: •  Revenue and Expenditure Control Act (1968).

•  10% surcharge on income taxes. Social security payroll tax hike. Increase in phone and auto excise taxes (3.1% of GDP)

•  From GDP growth pace of 5% and 4% unemployment into recession •  Recession was very mild and short (11 months duration)

• Most forecasts show that fiscal cliff will push economy into recession. •  Forecasts of magnitude and length of recession vary

•  Different types of models (underlying features) •  Different input data (types of scenarios modeled, estimates of

magnitude of fiscal cliff components)

Fiscal Cliff Forecasts, 2013 Organization Budgetary Impact

(% of GDP) Economic Impact (% of GDP)

Policies Included

CBO 3.3% 0.3% to 2.9% Tax cuts, AMT, jobs measures, sequester

CRFB 4.2% 2.2% Tax cuts, AMT, sequester, doc fix, ACA, jobs measures

Moody’s 4.2%-4.5% 3.6% Tax cuts, AMT, sequester, doc fix, ACA, jobs measures

Morgan Stanley 5% 2.5% to 7.5% Tax cuts, jobs measures, sequester, war drawdown, ACA

Goldman Sachs 4% 4% Tax cuts, sequester, jobs measures

Bank of America Merrill Lynch

4.6% N/A Tax cuts, AMT, jobs measures, sequester, doc fix, BCA

Source: Committee for a Responsible Federal Budget (CRFB)

Virginia is More Vulnerable to Federal Cuts

0 5 10 15 20

Federal Grants Subject to Sequester as % of State Revenue

Federal Spending as % of GDP

Defense Spending as % of GDP

Nondefense Spending as % of GDP

Federal Nondefense Workforecase as % of Total

U.S. Virginia

Source: Pew Center on the States Note: DC, MD, and VA combined because of common commuting area

Some Virginia Results •  Sequestration

•  Center for Regional Analysis (George Mason University) and Chmura Analytics.

•  The Economic Impact of the Budget Control Act of 2011 on DOD and non-DOD Agencies (for the Aerospace Industries Association)

•  207,571 job losses in FY 2013 •  Assessing the Impact of the Federal

Budget Cuts on the Virginia Economy (for the Virginia Economic Development Partnership)

•  164,225 cumulative job year losses FY 2012-2013

•  Hampton Roads Planning District Commission.

•  Total job impact in Hampton Roads region—26,500 (2014)

•  Fiscal Cliff •  American Action Forum. The Fiscal

Cliff: What you need to know and how to avoid it.

•  35,700 to 223,400 total jobs

State Fiscal Cliff Impacts

Methodology

•  Regional Economic Models Inc. Policy Insight (REMI PI+) Model for Virginia

•  Model is well respected with solid theoretical foundation

•  Components of Fiscal Cliff expenditure and tax changes were mapped onto REMI policy variables

•  Input data were drawn from Congressional Budget Office (2013) and National Association of Manufacturers (2014-2022)

Economic Impact Scenarios • Three Economic Impact Scenarios •  #1: Health care tax

implementation, payroll tax holiday suspension, emergency unemployment insurance benefit suspension

•  #2: +Sequestration •  #3: Fall off the fiscal cliff

Virginia Employment Under Scenarios

4.2

4.4

4.6

4.8

5

5.2

5.4

5.6 20

00

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

Em

ploy

men

t (M

illio

ns)

Baseline Scenario I Scenario II Scenario III

Source: Weldon Cooper Center, Virginia REMI Model

Virginia Employment Growth Under Scenarios

-3

-2

-1

0

1

2

3

4

2000

20

01

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

20

13

2014

20

15

2016

20

17

2018

20

19

2020

20

21

2022

Base Scenario I Scenario II Scenario III

% change


Contraction is sharper and deeper than Great Recession for VA

Virginia Employment Impacts under Scenarios

-226,755

-255,152

-256,840 -252,911

-249,705 -244,712

-300,000

-250,000

-200,000

-150,000

-100,000

-50,000

0 2013 2014 2015 2016 2017 2018

Scenario I Scenario II Scenario III

Virginia versus U.S. Employment Growth with Fiscal Cliff

-3

-2

-1

0

1

2

3

2000

20

01

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

20

13

2014

20

15

2016

20

17

2018

20

19

2020

20

21

2022

Nation Virginia

% change


Less severe for VA here

More severe for VA here

Longer Run Trends

-4

-3

-2

-1

0

1

2

3

4

5

The Great Stagnation


State Revenue, Actual and Forecast by Calendar Year

-10

-5

0

5

10

15

2000

20

01

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

20

13

2014

20

15

2016

Forecast Historical

% change

Source: U.S. Census Bureau, State Government Finances; Weldon Cooper Center, Virginia REMI Model

Governor’s Revenue Estimates will be released with budget on December 17

Other State Revenue Effects • Virginia tax code is linked

to the federal tax code •  Reduction in federal tax

credits (Earned Income Tax Credit, Child and Dependent Care Credit) Reduction in federal business deductions

•  Decrease in federal corporate income deductions (e.g. enhanced expensing and bonus depreciation rules)

•  Change in treatment of Estate Taxes

Thomas Jefferson Planning District Fiscal Cliff Impacts

Virginia versus U.S. Growth with Fiscal Cliff

-3

-2

-1

0

1

2

3

4

2000

20

01

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

20

13

2014

20

15

2016

20

17

2018

20

19

2020

20

21

2022

Nation Virginia TJPD

% change


Less severe for TJPD here

More severe than US but less than VA here

TJPD Employment Growth

-4

-3

-2

-1

0

1

2

3

4

5

Fiscal Cliff Business As Usual

4/5ths as deep as Great Recession and half as long

% change


TJPD Employment

90,000

95,000

100,000

105,000

110,000

115,000

120,000 20

00

2001

20

02

2003

20

04

2005

20

06

2007

20

08

2009

20

10

2011

20

12

2013

20

14

2015

20

16

2017

20

18

2019

20

20

2021

20

22


Consumer Tax Revenue and Personal Income Growth

-8 -6 -4 -2 0 2 4 6 8

10 12

Taxes Personal Income

% change


List of Federal Grants/Programs on Sequestration Chopping Block •  Community Development Block Grants (CDBG) and USDA Rural

Development Programs •  U.S. Economic Development Administration (EDA) •  Home Investment Partnership Program (affordable housing) •  Section 8 Housing •  Department of Justice State and Local Law Enforcement Assistance

Grants and The Community Oriented Policing Services (COPS) Program •  EPA State and Local Grants •  The Department of Labor Training and Employment Services account •  The Department of Education Accelerating Achievement and Ensuring

Equity Account •  FEMA State and Local Programs, which include Urban Area Security

Initiative grants and the State Homeland Security Grant program •  AMTRAK funding •  Federal Transit Capital Investment Grants •  Rebate payments on Build America Bonds

Source: National League of Cities based on Office of Management and Budget

Conclusions

Conclusions •  TJPD has weathered the recent five years as well as the state

and better than the nation. •  There is much uncertainty about how severely Sequestration

would affect Virginia. The composition and geographical distribution of the cuts is undetermined. But, it will undoubtedly be more severe than other states.

•  A Fiscal Cliff induced recession SHOULD be less deep and of shorter duration than the Great Recession for TJPD. For the state, it will be deeper but shorter than Great Recession.

•  Even if Fiscal Cliff is avoided, nation, state, and region face slower growth than easy money induced growth of 90s and 2000s. Adapting to new era of lower expectations may be difficult.

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