February 2023�Revenue Estimate

February 28, 2023

Office of the Chief Financial Officer

Government of the District of Columbia

Deteriorating economic outlook amidst mixed signals

• Current economic outlook: Slowdown by the end of 2023 into early 2024
• Federal Reserve’s tightening of monetary policy will slow economic growth
• High mortgage rates have already slowed housing market activity
• DC commercial real state market continues to weaken; vacancy rates are now about 15%
• Labor market still relatively strong, but there are signs of weakness
• Withholding taxes, which are directly correlated with wages and salaries, remain strong
• Unemployment rate remains at historic lows with no signs of increasing claims for unemployment insurance
• Job growth has slowed because Federal employment is down, delaying a return to pre-pandemic employment levels
• Although US economy still adding jobs at historically high rate, DC remains about 34K jobs below the pre-pandemic levels

2

Office of the Chief Financial Officer

Government of the District of Columbia

DC economic performance lags US on key indicators

3

02/28/2023

Office of the Chief Financial Officer

Government of the District of Columbia

FY 2023 year-to-date revenue growth still strong

​

​

​

4

02/28/2023

• Overall, year-to-date tax collections trending above forecast

​

• YTD growth mainly due to stronger sales and withholding income taxes
• Withholding up 9.8% possibly due to bonus payments tied to CY2022
• Sales taxes receipts boosted by recovery in leisure and hospitality and retail spending, but also benefit from inflation

​

• Deed taxes down by about 47.6%, a symptom of weakening real property market

• Decline in gross receipt taxes collections is mostly due to higher audit related collections last year relative to this year; decline in public utility taxes receipts also contributed

Office of the Chief Financial Officer

Government of the District of Columbia

FY 2023 - FY 2027 Revenue Forecast

5

02/28/2023

Office of the Chief Financial Officer

Government of the District of Columbia

Major components of the revised revenue estimate

6

02/28/2023

Office of the Chief Financial Officer

Government of the District of Columbia

Components of revisions: Real property & sales

7

02/28/2023

Note: Revision to hotel taxes also reflects the enacted rate increase from 14.95% to 15.95%

Office of the Chief Financial Officer

Government of the District of Columbia

Components of revisions: Income taxes

8

02/28/2023

Office of the Chief Financial Officer

Government of the District of Columbia

Actual and forecasted trends in major revenue sources:

9

02/28/2023

Office of the Chief Financial Officer

Government of the District of Columbia

Risks to Outlook

National:

• Elevated risk of national recession
• Geopolitical: escalation of war in Ukraine and tensions with China
• Debt ceiling negotiations: disruption of financial markets and federal government operations

District:

• Remote work stays high compared to pre-pandemic levels
• Federal employment continues to decline
• Population recovery stalls

​

​

​

​

10

02/28/2023

Office of the Chief Financial Officer

Government of the District of Columbia

11

02/28/2023

Questions?

Office of the Chief Financial Officer

Government of the District of Columbia

12

02/28/2023

Appendix:

Alternative Scenarios

Office of the Chief Financial Officer

Government of the District of Columbia

Two major sources of risk for the District’s economy

13

02/28/2023

Office of the Chief Financial Officer

Government of the District of Columbia

Alternative scenario #1: A steeper economic slowdown

14

02/28/2023

• Assumes a more significant economic slowdown than the baseline forecast :
• Reduction in resident employment
• Reduced growth in wages and salaries of District residents
• Reduced consumer spending and stalled recovery of leisure and hospitality sector as personal income declines

​

Office of the Chief Financial Officer

Government of the District of Columbia

Alternative scenario #1: Steeper economic slowdown

15

02/28/2023

Office of the Chief Financial Officer

Government of the District of Columbia

Actual and forecasted trends in major revenue sources

16

02/28/2023

Real property

Office of the Chief Financial Officer

Government of the District of Columbia

Alternative scenario #2: Steeper decline in property market  

17

02/28/2023

• For FY 2023 and 2024, this scenario assumes reduced collection rates, down to 94% collection rate from a baseline collection rate of 96%
• The office market drives most of the reduction in collection rate, down 3% from baseline resulting from increased appeals and refunds as the office market deteriorates further with sharp rise in vacancy rates 
• For all property types but office, this scenario assumes that collection rates in FY23 will equal the lowest rate experienced so far since the outbreak of the pandemic (FY19-FY22), a decline of about -0.6% from baseline
• Increased refunds are estimated to reduce FY23 revenue by another $18 million, implying a total FY23 revenue adjustment of -$48 million in the baseline scenario
• The scenario assumes that the increase in the impact of appeals in FY23 and FY24 will be 50% higher than assumed in the baseline scenario; for example, refunds will increase by 30% in FY23 instead of the assumed 20% in the baseline scenario

​

• For FY 2025 and beyond, we assume property values falls as office vacancies rise by about 5 percentage points
• We use the following rough relationship between office vacancies rates and revenue based on past data:

​

​

Office of the Chief Financial Officer

Government of the District of Columbia

Alternative  scenario #2: Steeper decline in property market

18

02/28/2023

Office of the Chief Financial Officer

Government of the District of Columbia

Actual and forecasted trends in major revenue sources

19

02/28/2023

Real property

Office of the Chief Financial Officer

Government of the District of Columbia