The Economic and Revenue Forecast Council (ERFC) will adopt its next update to its forecast of state revenues on February 19th. This revenue forecast will be based on a forecast of the state economy prepared by the ERFC staff. A preliminary version of this economic forecast is now available (here).

The preliminary February economic forecast is a (teeny) bit better than the November economic forecast upon which November revenue forecast was based. For both 2020 and 2021, state personal income is $6.4 billion higher in the new forecast than in the old. In the new forecast, state employment is 9,000 higher for 2020 than in the old and 11,000 higher for 2021.

There have been two revenue collections reports since the November revenue forecast. Over these two months, collection exceeded forecast by $168.7 million (3.7 percent). More than one half of this, $88.7 million, was in real estate excise tax (REET), however. The last two month’s REET surpluses are likely to be offset by REET deficits in coming months: As a result of legislation enacted during the 2019 session, REET rates applicable to high value properties jumped on January 1. (See pages 4 and 5 our brief on 2019 tax legislation here.) A significant number of transactions were accelerated to beat the rate hike and this effect was not fully captured in the November revenue forecast. ERFC’s January Economic and Revenue Update explains:

Most of this month’s surplus collections came from real estate excise tax (REET), which came in $74.4 million (79.4%) higher than forecasted. Sales of large commercial property (property valued at $10 million or more) jumped to $5.4 billion after last month’s $1.7 billion in sales. Sales of properties between $1.56 million and $10 million in value increased from $777 million to $1.45 billion. These sales increased ahead of a change in REET rates on January 1, 2020 that will increase taxes on sales above $1.56 million. The forecast assumed this increase would happen but at a much lower magnitude. Total seasonally adjusted activity spiked to a new record level … . Cumulatively, collections are now $88.7 million (49.4%) higher than forecasted. This acceleration of large sales over the last two months will lower forecasted future sales, likely reducing future REET collections by more than the cumulative surplus.

The good news is that over the two-month period revenue from non-REET sources exceeded forecast by $80.0 million for reasons other than timing.

Given the modest improvements in the economic forecast and the positive collections experience for non-REET sources, it is likely that the February 19 revenue forecast update will give legislative budget writers a bit more money to play with as they write their supplemental budget.