Planning through a pandemic: Economic Forum begins difficult task of projecting Nevada’s tax revenue
The Nevada Independent
EDITOR'S NOTE: This story was first published Oct. 16 by The Nevada Independent and is republished here with permission. For more Nevada news, including wall-to-wall coronavirus coverage and a constantly updating live blog, visit The Nevada Independent.
When will a COVID-19 vaccine be developed and used widely? When will it be safe to travel again? And will the federal government issue another round of stimulus checks or other financial aid?
Those are just some of the questions that people in Nevada and across the country are grappling with as the coronavirus pandemic continues into its eighth month.
They’re also questions being assessed by a different group of people: the five private-sector taxation and finance experts on Nevada’s Economic Forum, who have been given the difficult task of trying to project the state’s tax revenue over the next two years with a host of major, unanswered questions about the pandemic and associated economic factors.
During its Thursday meeting — the first since mid-June — Forum members sat through more than six hours of presentations and analysis on a wide variety of economic factors. Those included wage and income data, region-specific employment numbers, housing information, tourism trends and more.
But presenters and nonpartisan legislative fiscal analysts agreed that members of the Forum were facing a difficult road ahead in trying to accurately guess tax numbers in the midst of a global health crisis.
“I would have never thought in my career as an economist that you’d show me an employment chart and it looks like a bird flying into a window,” Legislative Counsel Bureau Fiscal Analyst Russell Guindon said during the meeting. “To see that kind of pronounced fall, it’s just crazy.”
The five members of the Forum, who are appointed by the governor and Legislature, are tasked with projecting revenues from the state’s major and minor tax sources. Members of the Forum typically approve projections by selecting one of three forecasts offered by analysts with the Governor’s Finance office, the Legislature and with Moody’s Analytics.
By law, the Forum must submit tax revenue projections to the governor’s office by Dec. 3 during odd-numbered years, which are then used to build state budget recommendations. They meet again in May of even-numbered years to issue a final projection, which is then used by the Legislature to craft the state’s two-year budget.
Though most of the meeting focused on general and region-specific economic information and indicators, members of the Forum were also briefed on the status of past tax projections.
Actual tax collections to date have slightly exceeded a revised “consensus estimate” from legislative and gubernatorial budget staff made in late June. Tax revenue is up 2.2 percent, or $88 million, from the revised June estimate, but still 9.1 percent, or $369 million, below the original Economic Forum forecast that was used to build the state’s budget.
Heading into the 2021 Legislature — which will begin in February — many of the analysts who testified on Thursday said the Forum should take a cautious outlook on the future of the state’s tax revenue sources.
Jeremy Aguero, a principal analyst with Applied Analysis, said he was “very concerned” about the state’s economic outlook heading into 2021 and 2022, as many economic models projecting a quick recovery generally relied on a COVID vaccine being developed early next year and quickly distributed over the subsequent 12 months.
While the business shutdown earlier in 2020 was economically harmful, Aguero said he is much more concerned that if a vaccine is not readily available, the main economic engine of the state — the Strip and tourism economy — will continue to lurch forward at a reduced capacity for three or four years owing to reduced domestic and international travel, as well as a greatly reduced convention market.
“So do I think it’s going to be the full magnitude of what we faced over the past few months, when our economy was essentially shut down? No, I don’t,” he said. “But it is the long arc of the COVID-19 crisis that keeps me up at night … we remain the least diversified economy of our size in the United States today, and the vulnerabilities associated with that are going to be problematic.”
Aguero added that the financial pressures on state and local governments are going to be “dramatic” over the next few years, and urged Forum members to be “conservative in your outlook.”
Las Vegas Visitors and Convention Authority Chair Steve Hill also had a mixed bag of news for members of the Forum. He said that driving traffic from Southern California has essentially recovered to pre-pandemic totals, but air travel numbers, room occupancy rates and overall gross gaming revenue remain significantly reduced from where they were before the pandemic.
Hill said one of his biggest concerns rests in the possibility that normal convention or meeting business will stay dormant. He said that Las Vegas in 2019 had more than 24,000 “meeting and convention” events (defined as any event with more than 50 people in attendance) that brought in more than 6.6 million people, and that failing to restore those types of events would have a major negative impact on the state’s financial outlook.
“And if we don’t see improvement, a clearer path toward having those meetings, we have customers who are looking to potentially cancel or looking to actually move to a different location that does offer them the opportunity to have that meeting,” Hill said. “So that’s the situation we find ourselves in now. The decisions that we’re making now are starting to affect that industry, that portion of our visitation.”
That aspect may be helped by Gov. Steve Sisolak’s decision two weeks ago to raise the state’s in-person gathering limit up from 50 to 250, with specific rules for conventions including a 1,000-person capacity limit.
Economic Forum Chair Craig Billings, who also is the chief financial officer of Wynn Resorts, agreed and said that the restoration of the convention and meeting business will play a critical role in how the state’s economy recovered.
“The dearth of both group and convention business — I think the impact on the city really cannot be understated,” he said. “It is what drives pricing power midweek. It is what drives a tremendous amount of operating leverage through the town. And employment will be unusually dependent on its return, actually.”
Overall, Nevada has recovered about 52 percent of the jobs lost during the initial partial business shutdown ordered by Sisolak in mid-March, according to economic development officials.
In a stark divide between the haves and have nots, home sales in Nevada are hot even as the state grapples with how to avoid an impending wave of evictions that is projected to affect more than a third of renters by the end of the year.
“We’re seeing a residential market that is really moving counter intuitively to the broader economy,” said Brian Gordon of the economics firm Applied Analysis.
Gordon highlighted record-setting median resale home prices in Las Vegas that reached north of $337,250 in September, a stunning gain from their Great Recession trough of $118,000 in 2012 and up nearly 9 percent year over year. With just one and a half months of inventory, Las Vegas is “woefully undersupplied” with homes, he said.
Low interest rates are giving people more buying power, and many are leaving more expensive coastal areas to get more bang for their buck in Nevada. With people increasingly working remotely, they are more free to leave big cities and pursue a more desirable physical house, Gordon said.
“Everybody is now doing everything from home,” he said. “They’re really not going on vacations and so people are just generally spending a lot more time in their personal residence.”
Gordon said Nevada’s mortgage default rate is about 9 percent, slightly more than the national rate of about 8 percent. Nearly 45,000 Nevada mortgages were past due in the second quarter, which is about one-third the number in default in the depths of the last recession.
If economic weakness continues another year or two, the home market could start to respond more, but Gordon said the state is better positioned now than before the Great Recession. Less than 3 percent of Nevada mortgages are underwater, compared with more than 70 percent in 2010.
“People have equity in their homes today moreso than they did leaning into the last cycle, so I think that provides some level of stability as well if we start to see pricing give way,” he said.
With more equity, Nevada homeowners generally have more “skin in the game” and are less likely to walk away from their homes than a decade ago when the state experienced a foreclosure crisis. Still, the bleaker factors of the economy could catch up with the housing market in the long term.
“Do I believe that we can continue to see home prices escalate, you know, by another 9 percent on top of 9 percent over the next year or two consecutively? It seems pretty unlikely,” Gordon said. “I would imagine there’ll be some sort of resetting, but that feels to me like it’s even beyond the six month timeframe that I was just sort of referring to.”
Construction could begin next year and require about 500 to 600 workers, with a permanent workforce starting at 150 to 200 people with potential to expand.