The Economic and Revenue Forecast Council met this morning in Olympia to discuss the preliminary version of the economic forecast that will underpin the updated revenue forecast scheduled to be unveiled on March 20^th.  The preliminary economic forecast is discussed in this memo. Handouts and slides from today’s meeting are available here.

The new economic forecast is weaker than the economic forecast upon which the November revenue forecast was based, largely due to happenings in Washington D.C. regarding the Federal budget:

• The deal to avert the January 1 fiscal cliff included $148 billion in federal tax increases and budget cuts; the November forecast assumed only $66 billion in tax increases and budget cuts.
• The fiscal cliff deal postponed sequestration for just two months; the November forecast assumed that the sequester would be postponed until 2014.

In the preliminary economic forecast, Forecast Council staff now assume that congress and the president will reach a deal that replaces the sequester with a package of budget cuts and tax increases totaling $9 billion over the remainder of 2013. This may prove to be optimistic.

As I noted in an earlier post, total collections since November have exceeded the amount forecasted by $84 million. While a positive variance such as this would normally lead me to expect a modest upward revision the the 2013-15 revenue forecast, ERFC director Steve Lerch notes that much of the positive variance is real estate excise tax due to a one-time spike in commercial property transactions in late 2012 in advance of the hike in federal capital tax rates. The higher rate of REET collections will not be sustained.

On balance, the weaker economic forecast outweighs the positive collections experience. In addition, the new revenue forecast will incorporate the revenue impact of the state Supreme Court’s Bracken decision regarding the estate tax, which the Department of Revenue estimates will reduce state revenue by $160 million in the current biennium. Based on all this, I expect that the March 20 revenue forecast will show less revenue for the 2013-15 biennium than the November forecast does.

The collection report for the February 11-March 10 period should be released next Tuesday.

Here is the video of today’s ERFC meeting: