KING COUNTY AND SEATTLE MOTOR VEHICLE EXCISE TAX BASE PROJECTIONS

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Gloria Blake
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1 KING COUNTY AND SEATTLE MOTOR VEHICLE EXCISE TAX BASE PROJECTIONS 1. SUMMARY Based on my current work for Sound Transit ( Sound Transit Tax Base Forecast, Dick Conway & Associates, August 2005), I expect that the average annual growth rate of the King County motor vehicle excise tax base will decline from 10.2 percent between 1975 and 2004 to 5.0 percent between 2004 and 2030, while the growth rate of the Seattle motor vehicle excise tax base will drop from an estimated 9.2 percent to 4.4 percent. The 4.4 percent growth rate for Seattle is significantly less than the 6.1 percent long-run growth rate adopted by the Seattle Monorail Project. The slowdown in the motor vehicle excise tax base growth rate is attributable to three factors: (1) a significant deceleration in the growth of the prime driving-age population (20 to 64 years of age); (2) a slowing rise in the number of vehicles per person 20 to 64 years of age; and (3) a declining inflation rate. A comparison of King County growth rates for and reveals that these trends have been underway for years. Although the projected 4.4 percent growth rate for the Seattle motor vehicle excise tax base is low by historical standards, it does not constitute a worse case scenario. It is consistent with the most likely case scenario for King County, which resulted in the projected 5.0 percent growth rate for the county. Moreover, I can think of reasons why my Seattle forecast may too low (e.g., the city may grow faster than I predict) or too high (e.g., the average value of registered vehicles may inflate at a lower rate). 2. FORECASTING METHODOLOGY The King County motor vehicle excise tax base projection was produced with two econometric models: (1) the Puget Sound Economic Forecasting Model, which forecasts employment, personal income, the unemployment rate, consumer price index, and population for King, Pierce, Snohomish, and Kitsap counties; and (2) a motor vehicle excise tax base model, which forecasts the number of registered motor vehicles by type (passenger cars, gas trucks, diesel trucks, and other motor vehicles) and the motor vehicle excise tax base. The regional economic model, whose forecasts are published quarterly in The Puget Sound Economic Forecaster (Conway Pedersen Economics, Inc.), makes use of U.S. economic predictions produced by the Blue Chip panel of national economists and Global Insight, a long-standing business forecasting firm. This approach to forecasting ensures that the King County motor vehicle excise tax base projection is compatible with both the regional and national economic outlooks. Over the past eleven years, I have applied this modeling system to produce long-run economic and tax base forecasts for the Puget Sound Regional Council, Sound Transit, and the Regional Transportation Investment District.

2 2 The long-run Seattle motor vehicle excise tax base projection is derived from the King County forecast based on two assumptions: (1) Seattle population will grow about onethird as fast as King County population, which is close to the historical norm; and (2) the growth rate of registered motor vehicles per person years of age and the growth rate of the average vehicle value will be the same in Seattle as King County. The use of complex econometric models notwithstanding, forecasters can never promise completely accurate predictions because of the uncertainty of the future. On the other hand, when properly used, such models help ensure that the forecasts are reasonable, that is, consistent with what we know at the time about the behavior of the economy, its past trends and current conditions, and its national and world economic environment. 3. MOTOR VEHICLE PROJECTIONS Conceptually, the method for forecasting the motor vehicle excise tax base is simple, involving three steps: (1) forecasting the number of motor vehicles; (2) predicting the average vehicle value; and (3) projecting the tax base by multiplying the number of vehicles by the average value. Table 1 Factors Affecting Motor Vehicle Excise Tax Base Motor vehicles Driving-age population Per capita income Labor force participation Unemployment rate Average vehicle value Average car price Consumer price index Note that for purposes of presentation the following analysis is conducted in terms of average annual growth rates calculated from historical data and projections. A convenient feature of growth rates is that they can be added or subtracted to derive, at least approximately, related growth rates. For example, as shown in Table 7, the number of registered motor vehicles in King County increased at a 0.94 percent annual rate (from 1,534,300 to 1,733,400) between 1991 and 2004, while the average value of the registered vehicles rose at a 5.13 percent rate (from $5,391 to $10,330). Thus, the motor vehicle excise tax base climbed at a 6.12 (= , approximately) percent rate (from $8,272.1 million to $17,905.9 million).

3 Figure 1 King County Cars and Population, Years 1600 Thousands Cars Population, Years 1.2 Figure 2 King County Cars Per Person, Years

4 4 Table 2 King County Motor Vehicle Growth Rates Population, years Vehicles per person, years Motor vehicles Making use of King County passenger cars, Figures 1 and 2 illustrate the general behavior of motor vehicles. The vertical line in the each chart designates the beginning of the forecast period. Note that cars represent about two-thirds of the total number of registered motor vehicles and three-fourths of the motor vehicle excise tax base in the county. The graphs show that while the number of passenger cars in King County has been highly correlated with the prime driving-age population (20-64 years of age), it has been rising at a faster rate. Historically, the long-run increase in the number of cars per driving-age person has been due to rising real per capita income as well as a jump in the labor force participation rate in the 1970s and 1980s related to the influx of women into the workforce (i.e., the emergence of the two-worker household). As evident by the drop in passenger cars per person during the recession, the near-recession of the early 1990s, and the recession, car registrations are also sensitive to the cyclical position of the economy. As a consequence, the unemployment rate, a key cyclical indicator, appears in the forecasting equations for all four types of motor vehicles. Table 3 King County and Seattle Population Growth Rates King County Population Population, years Seattle Population Population, years In the future, population in King County and Seattle will expand more slowly than in the past, according to my projections. The drop in the Seattle growth rate will be mitigated somewhat by the impact of the region s growth management plan, which is an attempt to

5 5 further concentrate people and jobs in our largest cities. Combined with the aging of the baby-boom generation, slower population growth will contribute to a dramatic downshift in the annual growth rate of the prime driving-age population (Tables 2, 3, and 4). In King County, it will decline from 1.9 percent between 1975 and 2004 to 0.5 percent between 2004 and The Seattle growth rate will fall from 0.9 percent to -0.1 percent. The impact of our aging population is vividly portrayed in the projection that Seattle s driving-age population will decline between 2004 and 2030 despite the anticipated increase in total population. While total population will increase from 571,500 to 617,800, population between 20 and 64 years of age will decline from 402,600 to 394,800. The drop in driving-age population as a fraction of total population from 70.4 percent to 63.9 percent mirrors the decline from 59.8 percent to 54.2 percent predicted for the United States by the U.S. Census Bureau. There will also be a fall-off in the growth rate of motor vehicles per person years of age, from 0.5 percent to 0.4 percent, primarily because of the end of the rapid increase in the labor force participation rate. But vehicles per driving-age person will continue to rise because of increasing real per capita income as well as the short-term boost from the current economic recovery. Table 4 Seattle Motor Vehicle Growth Rates Population, years Vehicles per person, years Motor vehicles There is one other technical factor related to the forecasting model that will increase vehicles per driving-age person over time. According to the model s formulation, the shift of population from the year cohort to the 65 year and older cohort will have the effect of raising the ratio of motor vehicles to driving-age persons. Specifically, when a person turns 65, he or she leaves the denominator of the ratio (persons years), but his or her vehicle will remain in the numerator (vehicles), at least for a time, resulting in an increase in the ratio. As a consequence of the slowing growth rates for driving-age population and the number of vehicles per driving-age person, the motor vehicle growth rate in King County will decline from 2.4 (= ) percent between 1975 and 2004 to 0.8 percent between 2004 and 2030, while the growth rate in Seattle will fall from an estimated 1.5 percent to 0.3 percent.

6 6 4. VEHICLE VALUE PROJECTIONS Prices are largely established in national and world markets. As a consequence of the competition in these markets, there is a tendency for all prices to move in concert. Thus, if the general inflation rate were cut in half, one would expect to see the inflation rates for most products, including vehicles, to decline by a similar amount. One of the remarkable economic developments of the past two decades has been the decline in the overall inflation rate. As measured by the Seattle consumer price index, the inflation rate fell from an average of 6.2 percent between 1975 and 1991 to 2.9 percent between 1991 and 2004 (Table 7). Similarly, the inflation rate for the average car price declined from 7.5 percent to 4.1 percent, while the inflation rate for the average value of registered vehicles in King County dropped from 9.7 percent to 5.1 percent. Note that the inflation rate for the average vehicle value between 1975 and 1991 is probably overstated. The switch by the Washington Department of Licensing from using market value to Manufacturers Suggested Retail Price (MSRP) in the valuation of motor vehicles around 1990 had the effect of raising the inflation rate to 16.8 percent in 1990 and 18.2 percent in 1991, well out of line with the 5-7 percent rates in the years just before and after the change in the valuation method. Table 5 King County Average Vehicle Value Growth Rates Average vehicle value Average car price Consumer price index According to national forecasters, the inflation rate will remain low in the future. For example, between 2004 and 2030, Global Insight calls for a 2.7 percent rate for the U.S. consumer price index (the same as that for the Seattle consumer price index). Based on that assumption, my econometric model predicts a 3.5 percent rate for the average car price and 4.1 percent rate for the average vehicle value, as shown in Table TAX BASE PROJECTIONS Given the projections of motor vehicles and the average vehicle value, Table 6 shows the implied growth rates for the King County and Seattle motor vehicle excise tax bases between 2004 and The King County growth rate is 5.0 (= ) percent and the Seattle growth rate is 4.4 percent. Roughly speaking, these forecast growth rates are approximately one-half of their historical rates, 10.2 percent and 9.2 percent, respectively.

7 7 The difference between the projected county and city growth rates is traceable to the difference in the population growth rates. It should be pointed out that the Puget Sound Regional Council (PSRC) currently projects that Seattle will grow as fast as King County between 2000 and 2030, 0.8 percent per year, according to the agency s small-area forecasts. In this case, the Seattle motor vehicle excise tax base would expand at a 4.9 percent annual rate. In my opinion, however, the Seattle population growth rate is unreasonable, since Seattle has never grown as fast as King County, at least not in recent memory. My 0.3 percent population growth rate is based on my forecasts for Seattle City Light. And there are reasons to believe, such as escalating home prices in the city, that my projection may be optimistic. Table 6 King County and Seattle Motor Vehicle Excise Tax Base Growth Rates King County Motor vehicles Average vehicle value Motor vehicle excise tax base Seattle Motor vehicles Average vehicle value Motor vehicle excise tax base RECENT TRENDS This report concludes with a discussion of recent trends in King County. Table 7 compares the period with the period. The year 1991 is selected as the dividing line to eliminate the distorting effects on motor vehicle values in the latter period because of the change in the Department of Licensing s valuation method. In general, the table shows that the predicted slowdown in the growth of the motor vehicle excise tax base is a continuation of a past trend. Because of declines in the growth rates of driving-age population, vehicles per driving-age person, and vehicle inflation rates, the King County motor vehicle excise tax base growth rate fell sharply from 13.7 percent to 6.1 percent.

8 8 Table 7 King County Selected Growth Rates Population, years Motor vehicles per person, years Motor vehicles Average vehicle value Motor vehicle excise tax base Population Average car price Consumer price index Table 8 focuses on the last four years. The low growth rates for population and motor vehicles reflect the severe recession that hit King County in Somewhat disturbing is the low inflation rate for the average vehicle value, although this too could be a manifestation of the three-year downturn. The 2.4 percent rate between 2000 and 2004 is significantly less than the 4.1 percent rate I am predicting over the forecasting period. Table 8 King County and Seattle Selected Growth Rates King County Population 0.54 Population, years 0.78 Motor vehicles Average vehicle value 2.41 Motor vehicle excise tax base 2.32 Seattle Population 0.34 Population, Finally, a recently released publication by the Washington Office of Financial Management reported that while King County population increased 1.1 percent in 2005, up from 0.5 percent in 2004, Seattle population increased only 0.1 percent, about the

9 9 same as the year before. Note that all other population estimates in this analysis come the Census Bureau. Dick Conway Dick Conway & Associates August 15, 2005

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