View our revenue estimate presentation and full letter with data appendices here
Below is the letter the Office of Revenue Analysis sent to the Mayor and DC Council, outlining our February 2024 revenue estimate and economic outlook for the District of Columbia. This estimate forms the basis for spending in D.C.’s fiscal year 2025 budget.
This letter certifies the revenue estimate for the Fiscal Year 2024 – 2028 Budget and Financial Plan of the District of Columbia. The FY 2024 local source revenue has been revised upward by $67.6 million as year-to-date collections data show higher than expected receipts for the corporate franchise tax, the gross receipts tax, and non-tax sources. The revenue for the rest of the financial plan period has also been revised upward, primarily due to higher forecasted revenue for corporation franchise tax, insurance premiums, and interest income. However, the forecasted revenue for real property tax is slightly lower, reflecting data from preliminary real property tax assessments that form the basis for revenue in FY 2025. Additionally, year-to-date revenue collections through January for deed and unincorporated business taxes, which are both indicators of the strength of the real estate market, have continued to decline. The net result is that FY 2025 revenue is higher by $64.3 million, FY 2026 by $62.1 million, and FY 2027 by $10.7 million. The table below compares the current estimate with the estimate from December 2023.
The near-term economic outlook for the nation and the District has slightly improved compared to our earlier forecast. The economy has shown greater resilience to higher interest rates than economists had anticipated. Additionally, as inflation nears the 2 percent target, the Federal Reserve has hinted at the possibility of cutting rates in 2024. That said, there are headwinds in the medium to long term, including a weakening commercial property market, a slowing DC labor market, slower wage growth, and an expected decline in consumer spending as excess savings built up during the pandemic are exhausted. Year-to-date tax receipts through January show evidence of slower growth in tax revenue. Strong growth in receipts from corporation franchise, sales, and individual income withholding taxes are mostly offset by slower growth in receipts from non-withholding individual income, deed, and unincorporated business taxes. Overall revenue is above the forecast because of strong growth in non-tax receipts, primarily from interest income.
The revenue forecast was informed by a variety of data sources, including the latest cash collections data, official data on key economic indicators, and forecasts prepared by the Congressional Budget Office and private forecasters, S&P Global and Moody’s Analytics. What emerges from a thorough review of these data sources and modeling of their impact on the District is a slowly growing economy over the next year.
Revenue Highlights
As mentioned earlier, the year-to-date revenue growth for FY 2024 as of January is higher than previously forecasted. The increase in revenue is mainly due to higher non-tax and corporate income tax receipts, which have compensated for the decline in receipts from individual non-withholding income, deed and unincorporated business taxes. We now anticipate flat growth in revenue for FY 2024, rather than a 0.6 percent decline, a slight improvement from the previous forecast. An average growth rate of 2.3 percent is projected over the financial plan period as the deteriorating commercial real estate sector continues to be a drag on the District's fiscal performance.
Real property tax revenue
The real property tax revenue forecast for FY 2024 is unchanged from the December forecast, with revenue expected to decline by 1 percent due to the continued weak performance of the commercial office market. The latest data for tax year 2024 indicate that previous projections related to appeals and refunds are on target. The FY 2025 revised forecast is based on the latest real property tax assessment data. The forecast assumes the increasing likelihood of successful commercial property appeals as the commercial office market continues to decline. Therefore, for FY 2025 and the rest of the financial plan period, the forecast has been revised downward by an average of $22.7 million annually. The residential market has continued to perform much better than the commercial market, and revenue growth in residential property taxes is unchanged from the previous forecast.
Sales tax revenue
The sales tax collections through the first quarter of the fiscal year, which includes most of the holiday sales period, show sales tax revenue growth slowing sharply from last year's nearly 20 percent growth rate to just 3.5 percent this year. The slower growth was largely anticipated as the circumstances that drove last year's remarkable growth are behind us. Specifically, although inflation is still running above 3 percent, the rapid growth in prices that contributed to strong nominal sales tax growth has slowed. In addition to lower inflation, consumer demand and the rapid recovery in the tourism sector that contributed to strong growth in fiscal years 2022 and 2023 have eased.
Consumption is now expected to revert to more normal growth patterns, with consumers retrenching from the spending spurred by pent-up demand after the pandemic. As a result, sales tax revenue growth is expected to decelerate from 12.9 percent last year to 1.9 percent in FY 2024. Furthermore, nationwide, there is now a shift in consumer spending from goods to services, such as childcare and healthcare services. Growth in these services, which are largely outside of the District’s retail sales tax base, will reduce growth in retail sales tax revenue. Growth in sales tax revenue is expected to average 3 percent in FY 2025 and FY 2026, and 2.5 percent in FY 2027 and FY 2028, as the reduction in the hotel tax rate from 15.95 to 14.95 percent takes effect in mid-fiscal year 2027.
Individual income tax revenue
Year-to-date individual income tax receipts declined 0.2 percent when compared to the same period in FY 2023 due mainly to a significant reduction in the non-withholding component of the income tax. As the labor market softens and wage growth slows, growth in individual income tax withholding receipts has slowed in recent months, with year-to-date growth of about 2.5 percent. Accordingly, the forecast for FY 2024 has been revised to reflect this slower growth and is expected to end the year with a year-over-year growth of 4.6 percent. The out-year forecast for withholding tax revenue has also been revised downward to reflect a forecasted slower growth in resident employment and wages, which are the main drivers of individual income tax withholding revenue.
According to the latest cash report, year-to-date non-withholding income taxes are down by 16.4 percent when compared to the same period last year. This decrease is mainly due to lower October final extension payments and higher refunds. Moreover, January estimated payments, which are typically a leading indicator of the upcoming April tax filing collections, have increased 2.8 percent, as opposed to the pre-pandemic average of 5 percent. This requires a downward adjustment to the earlier forecast, which had anticipated stronger growth. As a result, individual income tax revenue is projected to grow by 3.6 percent in FY 2024 before returning to the pre-pandemic long-term average growth rate of 4.5 percent for fiscal years 2025 through 2028.
Business tax revenue
Year-to-date corporation franchise tax receipts have increased by 16 percent as compared to the same period last year. This increase is mainly due to estimated tax payments, which have risen by 33 percent. As a result, the corporate franchise tax revenue forecast for FY 2024 has been revised upward by $111 million. Additionally, the out-year forecast has been revised upward by an average of $153.5 million annually. This revision reflects the upward adjustment of the forecast for key economic indicators of corporate tax revenue, including non-real estate investment and S&P 500 earnings.
On the other hand, year-to-date unincorporated business tax receipts are down by 31.8 percent, reflecting the continued deterioration of the commercial real estate market. Accordingly, the forecast is revised downward by approximately $6.9 million in FY 2024 and by an average of $13.1 million annually over the remainder of the financial plan period.
Deed tax revenues
Year-to-date, deed tax collections are 23.5 percent lower than FY 2023 levels. Although transactions initially increased in the first few months of the fiscal year due to the sale of a few high-value commercial properties, timed to take advantage of expected tax rate cuts, sales have since decreased. As a result, the value of real property transactions for both residential and commercial properties is lower, leading to a higher-than-expected decline in deed tax receipts. The forecast for both deed transfer and deed recordation tax revenue for FY 2024 is revised downward by a total of $37.7 million. Furthermore, the out-year forecast is also revised downward by a total of $39.8 million, as the deterioration of the commercial real estate market is expected to continue over the financial plan period.
Gross receipts tax revenues
The revenue from gross receipts tax has been revised upward by $7.6 million in FY 2024 and by an average of $14.7 million annually for FY 2025-FY 2027. This increase is mainly due to the impact of higher inflation on insurance premium collections.
Non-tax revenue
The non-tax revenue for FY2024 has increased by $73 million due to strong investment income from reserves. These strong interest earnings positively impact non-tax revenues throughout the financial plan, while lower than projected automated traffic enforcement revenues temper overall non-tax revenue growth. Non-tax revenues are revised upward by an average of $52.6 million annually over the financial plan period.
National and Regional Economies
The U.S. economy grew strongly in the fourth quarter, with an annualized gain in Gross Domestic Product (GDP) of 3.3 percent, surpassing the expectations of many experts. This represents an acceleration in GDP growth, from 1.9 percent in 2022 to 2.5 percent in 2023. Improvements in the economy's supply-side potential over the past year have helped keep inflation in check despite strong GDP growth and a historically low unemployment rate of 3.7 percent.
Consumer spending remained robust at 2.8 percent in Q4, indicating that households were well-prepared to handle the Federal Reserve's series of rate hikes. This resilience is partly due to fixed-rate debt taken on before interest rate tightening, and the savings accumulated during the pandemic, which have acted as a buffer. However, these excess savings are nearly exhausted after two years of solid consumer spending. Future consumption will increasingly rely on income growth. While real disposable income grew by 2.5 percent in the latest quarter, the expectation of a more relaxed labor market suggests slower wage growth in the next few quarters.
There are varying predictions for GDP in the first quarter of 2024 and subsequent quarters. The Blue-Chip Consensus forecast estimates that Q1 2024 GDP will grow by approximately 1 percent. On the other hand, the Atlanta Federal Reserve's GDP Now forecast is more optimistic and predicts a growth rate of 2.9 percent. After reviewing and analyzing various forecasts, including those of SP Global and Moody's, our forecast is for moderate growth of approximately 1.5 percent for Q1 2024.
Looking at the bigger picture, which includes the entirety of 2024, we expect the U.S. real GDP to grow at a rate of approximately 2.0 percent. This forecast, along with the forecasts for other economic variables for the nation and the District of Columbia, is dependent on a variety of factors. These include the performance of key economic indicators, global market trends, and policy considerations. The differences in projections reflect the uncertainties and complexities that affect economic dynamics. Therefore, it is essential that we closely monitor these variables and adjust our forecast as the economic landscape changes.
District of Columbia Economy
The District's economy continues to recover from the pandemic-induced recession of 2020. However, since the pandemic, the District of Columbia's economy has consistently underperformed the national economy across nearly all indicators. In two recent quarters (Q2 and Q3, 2023), however, personal income, including wages for DC residents, has grown faster than that of the nation. While wage growth remains strong, particularly for high-paying jobs, it is expected to moderate due to the high interest rate environment.
Although payrolls are increasing, the District’s job growth in the last 12 months has been below the national and Washington metropolitan area averages. In fact, neither the District's employment nor the resident employment levels are expected to return to their 2019 peak during the financial plan period.
The total number of jobs in D.C. increased by 11,339 from the 4th quarter of 2022 to the corresponding quarter in 2023. The leisure and hospitality sector has made significant strides, with a notable 8,307 increase in jobs, accounting for the majority (73 percent) of total job growth. Professional, education and health, and other services also added jobs during this period. On the other hand, employment in the federal government continued to contract. During the pandemic era, federal employment was relatively stable. However, over the last year, there has been a notable decline in federal employment (losing 3,878 jobs) in the District. There are various hypotheses regarding the decline in federal jobs, including early retirement, a transition towards contracted positions, and a relocation of jobs from Washington, D.C., to other regions across the nation.
The unemployment rate in the District averaged 5.0 percent in the fourth quarter of 2023, up from 4.2 percent a year earlier, a sign that the District’s labor market is struggling to absorb the new entrants. A notable positive development for the District’s economy is the significant growth in personal income in the third quarter of 2023, with a robust increase of 6.4 percent compared to the same quarter of the previous fiscal year. This is partly explained by the fact that federal relief payments to households ceased in the third quarter of 2022, thereby establishing a lower base for comparison. Nevertheless, this growth is noteworthy as it outpaces national growth under similar circumstances.
The near-term outlook for District’s economy is slowing job growth. It also faces downside risks, which include higher interest rates and the possibility of a federal government shutdown. The employment slowdown will further delay the District's recovery to its pre-pandemic employment level. As of Q4 2023, employment had reached 97% of its pre-pandemic level. Additionally, higher mortgage interest rates have negatively affected existing home sales, both nationally and regionally, leading to a decrease in the number of home sales in the District. This, in turn, has had a negative impact on revenue from real estate and construction-related sectors.
After a decline due to COVID-19, the District’s population has grown for two consecutive years. According to an updated population estimate by the U.S. Census Bureau in December 2023, from July 2021 to July 2022, the District's population increased from 669,037 to 670,949, a net gain of 1,912. The data show that in the following year, the District further added 8,023 residents, representing a 1.20 percent increase from July 2022 to July 2023.
Risks to the Forecast
The current economic forecast carries several risks. Although the chances of a recession this year have decreased after two-quarters of strong economic growth in 2023, the economy remains vulnerable. The full impact of higher interest rates on the economy is not yet known. The housing market has already slowed, as seen in reduced construction activity and sales. In the last forecast, we highlighted the possibility of WMATA service cuts as a major risk to the District's economy and its finances. Since then, WMATA has agreed to keep service at the current level for the next two years, but service level reductions and their consequences are a risk after the two-year hiatus. Public safety concerns have emerged as a risk amidst an uptick in crime and its extensive coverage by the media. Public perception of crime can have a negative impact on the economy and revenues as it can deter people from living, working, or visiting the District. Other risks include a rise in oil prices due to regional conflicts, labor market strikes, and the possibility of a prolonged government shutdown that could strain the economy.
The COVID-19 pandemic has brought about significant changes in the District's population and economy, with potential long-term implications. The population decline during the pandemic, coupled with the increasing prevalence of remote work, may lead to shifts in the demographic and economic landscape. If the population loss becomes permanent, the city's demographic profile could change. The extent and impact of such changes are not yet clear. Additionally, as more people work from home, the District's transportation and office real estate sectors are likely to experience significant shifts. With fewer commuters, there may be less demand for public transportation and office space, leading to a potential reduction in real estate prices. The federal government has reduced its office footprint, signaling a shift in the demand for office space. Overall, the pandemic and the shift towards remote work are likely to have far-reaching economic consequences for the District.
The prevailing risks and high degree of uncertainty make for a challenging forecasting environment. As such, we will continue to monitor international, national, and local economic activity for any developments that would impair the forecast.