As home sales in the Seattle area (and state-wide) plummet and prices stagnate and begin to decline, it looks like government revenues are following suit:
On top of November’s wet weather and the Northwest’s cooling housing market, the state’s top economist had dreary news for state leaders Thursday when he announced that Washington would be taking in about $132 million less than expected in his quarterly revenue forecast.
Washington’s housing and construction sectors are doing better than those in most other states, but ChangMook Sohn said the real estate slowdown is occurring sooner than in the most recent prediction. The subsequent change in the revenue forecast has a lot to do with predicted declines in real estate excise-tax collections.
This is exactly what Mr. Sohn has been warning would happen for some time now (see related posts here). I guess he didn’t get the memo from the Washington Realtors though, because they told me that Washington State has a strong economy and we’re adding tons of new jobs, making our real estate market “the envy of the nation,” and practically unsinkable. (Yes, George beat me to the punch on that joke, but I intend to get a lot of mileage out of these Realtor ads.)
“Though the decline in projected revenue is very small, this forecast reinforces the need to continue to save money to make sure we have the resources to maintain the services expected by Washington citizen,” Gregoire said.
I completely trust the government to manage our money wisely as the housing market continues to drag down state revenues, and the shortfall turns from “very small” to “surprisingly large.” Because saving money is what they’re good at.
(Chris McGann, Seattle P-I, 11.16.2007)
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26 responses so far ↓
1
softwarengineer
// Nov 16, 2007 at 9:57 am
BUT TIM, MSM SAYS HOUSING CONSTRUCTION UNEMPLOYMENT IS UNCHANGED
Unfortunately, undocumented immigrants (Hades, call ‘em illegal aliens) layoffs aren’t in the American house construction unemployment numbers.
The economy is rolling along full steam and unemployment is like 2%, we should be rolling dough….LOL
2
Mike2
// Nov 16, 2007 at 10:05 am
I guess the weak dollar hasn’t done much to juice the states exports yet, or not enough anyway.
3
Alan
// Nov 16, 2007 at 10:50 am
The state government will respond by raising property tax rates. That will increase the monthly nut to buy a house. Since most people think in terms of monthly payments, that will drive prices down further. That will drag down state revenue again.
The state government will respond by raising property tax rates. That will increase the monthly nut to buy a house. Since most people think in terms of monthly payments, that will drive prices down further. That will drag down state revenue again.
The state government will respond by raising property tax rates. That will increase the monthly nut to buy a house. Since most people think in terms of monthly payments, that will drive prices down further. That will drag down state revenue again.
.. rinse and repeat forever …
Houses are free but no one can afford the taxes on them. Current owners are not allowed to release their claim of ownership. New bankruptcy laws do not allow unpaid taxes to be forgiven. Property owners spiral into a death cycle of debt. The smart owners get out before too much damage is done by paying people to take property off their hands. Everyone blames subprime for the mess.
4
Mama
// Nov 16, 2007 at 11:06 am
OK, the tax thing really scares me — I rent but I’m pretty sure my landlord rolls at least part of the property taxes into the rent. Now, I know the wisdom goes, if you can’t even afford rent, you move away, but wouldn’t the property tax thing hold true everywhere (i.e. are other states “better” in terms of property taxes?)
5
MacAttack
// Nov 16, 2007 at 11:10 am
Hey, are you guys having any new-house AUCTIONS yet? Here in Portland, Buena Vista Homes (who offered a trip to Hawaii with the LEASE of a new house) decided they wanted to clear the 230 houses they have in inventory. Minimum bid $69,000… Portland Convention Center, December 15. See today’s Oregonian Business section.
6
Scotsman
// Nov 16, 2007 at 12:25 pm
Washington’s property taxes tend to be lower than other parts of the country, but I have a feeling parity may be on it’s way. Gazing into my crystal ball, I predict some in Olympia will want to add an income tax to supplement falling property receipts, and the mix between state, county, and local rates will change.
Remember the general rule of thumb- if you want less of something- tax it!
7
explorer
// Nov 16, 2007 at 1:08 pm
I think the Groundhog Day scenario described by Alan is actually very plausible. It remains to be seen how many times it can be done, before they get smart about spending what they DO have in places that count. Seems to me, a lot of that surplus dissapeared into special interest tax breaks.
An income tax here will never fly unless at least two conditions are met:
1. A proportional lowering of the Sales Tax
2. Exemptions for the first $50K in income
At first blush, the above may not seem like it would generate more revenue. However, it would make state taxation more progressive, and would in fact increase revenues by putting more of the burden on those who can most afford it.
8
WestSideBilly
// Nov 16, 2007 at 1:22 pm
For being a fairly liberal state, Washington seems fond of highly regressive taxes. I can see the smart folks in Olympia raising sales taxes 1% sooner than I can see them trying to add an income tax to the books.
As for Washington property tax rates, our rates are low but we’re already fairly high in terms of actual property tax paid and tax as percentage of income.
Reference
9
wageslave
// Nov 16, 2007 at 1:30 pm
Wonder what a possible 40% drop in housing prices (of houses valued at double the area median) in the Seattle area would do to state revenue?
http://money.cnn.com/magazines/fortune/price_rent_ratios/
10
Mike2
// Nov 16, 2007 at 1:51 pm
How would an exemption below $50K be progressive? You need to be making 3X that to afford a home in Seattle.
11
explorer
// Nov 16, 2007 at 3:18 pm
Mike2 said,
“How would an exemption below $50K be progressive? You need to be making 3X that to afford a home in Seattle.”
A “progressive” income tax is not based upon the affordability of a house. You might want to look up what a progressive vs. regressive tax is. It’s not a political ideology.
Besides, when prices revert to the mean, someone making the median income now would be able to afford a house, or at least a decent condo. Their income tax under a progessive structure would not be high enough to preculde that.
12
Alan
// Nov 16, 2007 at 3:53 pm
I think the Groundhog Day scenario described by Alan is actually very plausible.
Most of that post was meant to be a joke. However, I do think a higher property tax rate will lower property sales prices. I am amazed how low property tax is here. NC has a state income tax. Property tax where I lived there was 0.75% That isn’t much below WA’s tax. Texas has no state income tax (like WA). I was expecting property tax here to be closer to 2-3% like it is there. That is one of my theories as to why Texas housing is so “affordable”. Instead I discover it is only 1%. I predicted a long time ago that the state would raise property tax as prices fell.
Texas has a “homestead exception”. If you live in your property then the first $30k of value on the property is not taxed. Rentals don’t get that benefit. It gives owner-occupied housing a slight advantage over owner-landlord housing.
13
WestSideBilly
// Nov 16, 2007 at 4:51 pm
If my math is right, a 1% increase in property tax equates to a 10.5% decrease in house value to maintain the same payment (not including insurance which would presumably not change a lot). Certainly not a huge impact, but nothing to sneeze at either.
14
Ira Sacharoff
// Nov 16, 2007 at 5:55 pm
A state income tax here has always been the “third rail” and has ended politicians careers…but it does seem fairer to have the tax sources be more balanced and progressive.
Raising revenue is always tough to do.
My guess is that lowering the sales tax and lowering property taxes ( and replacing that with an income tax) would actually help stimulate the economy by giving people more immediate money to spend.
15
Alan
// Nov 16, 2007 at 7:11 pm
WSB,
Here are some ballpark calculations. I’m not positive how accurate this method is. I’m doing a lot of ballparking.
Monthly payment of $2500 pays for the interest on a $500k loan at 6% interest. 1.2% increase in property tax raises tax amount by $500/month. The new monthly payment of $2000 pays for the interest on a $400k loan. That is a 20% drop.
More importantly it makes the holding costs for investors holding empty properties. They need values to increase even more quickly to make money that way. Under the assumption that the bubble works like a Ponzi scheme (where people buy into the high prices for appreciation actually cause the appreciation), higher holding costs reduce the chance of a bubble forming.
16
EconE
// Nov 16, 2007 at 8:02 pm
how can there be a housing slump when they (S&P & Forbes) say that Seattle is one of the most undervalued RE markets in the country…along with San Fran, Boston, NYC and Charlotte.
http://www.forbes.com/2007/11/13/undervalued-markets-housing-forbeslife-cx_mw_1113value_slide_12.html?thisSpeed=15000
17
Roger
// Nov 17, 2007 at 2:00 pm
Alan, are you doing your math right? Right now, property taxes are generally about 1% of the appraised value per year, or $5,000 per year on our hypothetical $500,000 house. That’s about $417 a month.
If we raise taxes 1.2%, isn’t that $5 extra a month, to $422? If we raise the tax to 1.2%, That’s $6000 a year, or $500 a month, an extra $83. That’s not so hot but nowhere near an extra $500 a month.
I think what you’re conjecturing is more than doubling taxes, to 2.2% a year? That, indeed, would raise taxes to $917 a month. We’re in New Jersey territory, right there.
18
Alan
// Nov 17, 2007 at 2:50 pm
Raise by 1.2% to 2.2%.
19
Alan
// Nov 17, 2007 at 2:50 pm
Some counties in Texas (which also has not state income tax) have 3% property tax. 2% is the minimum in Texas. It isn’t outrageous considering the lack of income tax here.
20
Whoa Pardner
// Nov 17, 2007 at 4:41 pm
What do you suppose is the percentage of Seattlites who would like this area to be more like Texas?
Hint: it’s in single digits.
21
Alan
// Nov 17, 2007 at 7:43 pm
I’m not arguing Washington should be more like Texas. I’m arguing that that it will be. At least with respect to property taxes.
22
stephen
// Nov 18, 2007 at 12:42 pm
Alan,
Your right but I think some are missing your point, the reason % is lower here than Texas (I lived there for 20 years) , RE prices are substantially lower but the cost of goverment services are not much different. If prices drop by half here the tax (assuming the goal is to maintain the same level of cash inflow) would need to double or some combination in between depending on the actual drop. A mix of cuts and increases could be achieved obviously but it’s harder to cut services than to raise taxes IMHO.
The money has to come from somewhere…
23
Alan
// Nov 18, 2007 at 1:09 pm
I get that Stephen. I’ve been blaming higher properties taxes as the reason prices in Texas didn’t take off with the rest of the country.
As prices fall here, the state will want to make up the “lost” income. I predict they will do it by raising property tax rates.
Doubling the property tax rate from 1% to 2% should only make prices fall 20%. That results in a 60% increase in revenue ($500k@1%=$5k –> $400k@2%=$8k). They won’t need to raise it to 2%, but (I think) they will raise it.
24
Roger
// Nov 18, 2007 at 2:15 pm
I think a raising of property tax by that much would be very unlikely…which politician wants to be run out of office on that pony?
Raising the rates would require amending the state constitution:
“Amendments may be proposed in either branch of the legislature. The Legislature must approve the original proposal or an alternative to the proposed initiative with a 2/3 vote. The approved proposal is then placed on the ballot at the next state general election, and becomes law if approved by a majority of the electors. The state constitution may not be amended by voter initiative.”
So people would have to vote for it.
25
UrbanArtist
// Nov 18, 2007 at 8:11 pm
This mess is starting to take down renters now.
http://rawstory.com/news/2007/Renters_losing_their_homes_without_missing_1117.html
26
greenthum
// Nov 19, 2007 at 1:11 am
If the Dems try to raise property taxes next year, Dino Rossi will be elected governor.
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