Before the election, the Pew Charitable Trusts released its 50 state tax revenue analysis. It showed Nevada with an almost 8 percent tax revenue growth from its pre-recession numbers.
Then a few days after the election, the forecast at the monthly legislative economic forum was a bit more cautious. Part of it is that economists didn’t plan for a Donald Trump win. Part of it is that sales taxes are down.
Dan White said that taxes are down because the costs of goods is down. White is an economist with Moody’s Analytics, who has been consulting on Nevada’s economic forecast for about six years.
The cost of goods are down because oil commodities are down, and necessities like lumber are selling at bargain rates. This means that even though more houses are being built, they're selling for less, and less sales tax revenue is generated.
And this means less money in the state's coffers.
INTERVIEW HIGHLIGHTS:
Your modeling was based on a Clinton win. How does a Trump win change that?
So far, it hasn’t changed it much. I think what it does is it introduces a tremendous amount of uncertainty into the forecast in terms of policies. The Clinton campaign had been a little more transparent in terms of what precisely it was planning to do with its policies.
The Trump campaign has been a little more broad in terms of its policy discussions. There are still a lot of details that are going to have to be worked out with the Congress. What those details will end up looking like are not clear just yet.
President-elect Trump has promised to increase infrastructure what impact will that have on Nevada?
It can effect Nevada in a few different ways. It can help the state to better invest in itself, in terms of the way that some of these investments are traded for tax purposes. It can also help in terms of making it easier for folks around the country and really from around the world to get to Nevada given how much Nevada’s economy depends on tourism that could be a huge benefit as well.
You and a lot of economists are predicting trouble with sales tax revenue. Why?
It’s really something that is unique to where we are at in the business cycle right now. Remember: if prices are not going up then tax revenues are not going up – all else equal. Even in an economy where we’re at today, where we’re very near or at the top of the business cycle: wages are starting to come back and grow, people are starting to purchase more goods and services out in the economy, the prices for those goods are not growing.
But isn’t it a good thing that consumers are paying less?
It is a good thing for the economy. But it is not necessarily a good thing for sales taxes just because the taxable value of those goods is going down. It is less of an issue of it being a bad thing and more of it being an issue of it being what expectations were.
So because economists and revenue forecasters expected prices to behave like they always have, when they were doing their forecast for sales tax revenue for example, they expected sales taxes to be at a certain rate. So now, even though the economy is doing better, sales taxes are not coming in to the same rate that they thought they were. That matters to the budget because policy makers are making decisions based off of those forecasts going forward.
What is different about this business cycle?
There are a couple of things different about this business cycle. Remember, we are in year seven of the current expansion. That is longer than all but three other expansions in the U.S since World War II. And if we were able to get to June 2019, that would be the single longest period of expansion modern American history.
But if you look at the average person on the street and you ask them how the economy has been doing over the last seven years they’re probably not going to say it’s the strongest recovery in American history.
There’s a lot of reasons for that. Some of that is wages. Wages just haven’t grown to the extent that we’ve seen in previous expansions cycles. That is one of the reasons prices haven’t really expanded so far in the business cycle.
And then, the second thing is we’re seeing a greater disconnect between what’s going on in energy and commodity markets versus what’s going on in the U.S. economy. Normally, they work more or less in tandem together, but given the huge decrease in energy prices last year… with the stronger dollar, with weaker growth overseas, prices are just not behaving like they normally do.
On the Federal Reserve raising interest rates, which it is expected to do:
We would really be the only major central bank in the world raising interest rates in a time where everyone else is lowering interest rates or keeping them flat. That’s going to attract more money into the United States in terms of investment and in terms of deposits. That’s going to make for a stronger dollar and that’s going to make American goods less competitive overseas.
That matters a lot to Nevada especially if a tourist is looking to see whether it should come to Nevada for vacation or Mexico. If their local currency goes a lot further in Mexico than it does in the United States, it’s going to make things a lot cheaper for them.
What will all of this mean for inflation?
In the grand scheme of things, inflation is not necessarily a bad thing. Too much inflation is obviously a bad thing, but there is a sweet spot right around 2 percent that the Federal Reserve actually targets for a healthy economy. Prices need to be growing a little bit.
It’s not so much how much prices are growing, but why they’re growing. Are prices growing because there is an in balance somewhere in the economy and supply is not keeping up with demand? Or are prices growing because people have more money in their pockets?
That’s the kind of inflation we want to see. We want to see inflation going up because folks are stronger in their personal finances, and they’re able to afford higher prices for certain things.
Demand for housing in Northern Nevada is jumping sharply. If housing starts accelerate, will that mean a rise in prices?
Actually, it will be opposite. If housing starts accelerate, then that’s a good thing to bring prices down because that means supply is trying to catch up with demand.
One of the reasons we use housing in the forecast is because of the large number of durable goods that go into building and supplying a house… Then even when the house is built, and the new family moves in, they need to buy a refrigerator. They need to buy a lawn mower. They need to buy all kinds of things to outfit the house. Those are all taxable more or less.
We should see continued gains in homebuilding. There is plenty of demand out there to go around… there are supply constraints out there that are preventing homebuilding from increasing to where really it would be an equilibrium rate with demand.
What are some of those constraints?
The real sticking point is in terms of labor. If you look at the amount of workers that we need to go out and build these houses, we just don’t have the workforce out there to complete as many houses as we did in the middle of the 2000s.
We had some folks, especially skilled trades so your roofers, your electricians, your plumbers, a lot of those folks left the workforce. Either they went to another industry or they left the workforce completely. And left us with really a shortage in those skilled trades.
Tesla is moving ahead with its gigafactory in Northern Nevada. Are they moving fast enough? And are they going to bring enough stimulus and sales tax to the state?
It’s difficult to say this early on. I’ve certainly been impressed with the speed that they’ve been able to bring things online. Usually, when you do a project of this size you can really get bogged down in the construction cycle but they’ve been really impressive in terms of how quick they’ve brought things on.
I think the real crux of the issue in Northern Nevada is how quickly they’ll be able to grow the workforce and more importantly the skilled workforce to be able to continue to grow at the pace they are.
Next week is another economic forum, you are still as worried about the numbers as you were last month?
Yeah. Well, it depends. Over the near term I think we’re still pretty conservative in our view. Especially when we look at some of the goings on in the finance markets recently. So, in anticipation of the new president’s stimulus policies long-term rates have really risen quite significantly. We expect that to continue over the next year or so. So that may weigh a bit on 2017 growth.
Beyond that in 2018, 2019, I think there is some room for optimism, if some of these stimulus programs go into place, either the tax cuts or infrastructure spending. It has the potential to give the U.S. economy a shot in the arm at a time when it otherwise would be on the decline and be on the downside of that business cycle, probably heading into another recession some time in 2019, 2020.
If we could get some of that stimulus, we could potentially move that recession date out further into the future. That being said, if we add a tremendous amount to the deficit by doing those stimulus programs whenever eventual recession we run into could be worse. I think there are some off setting risks and we’re maybe not as pessimistic about the out years of the forecast as we were maybe a month ago.
Dan White, economist, Moody’s Analytics
