$1.3 billion less for 2014-15 budget according to IFO

On May 1, the Pennsylvania Independent Fiscal Office (IFO) released updated revenue estimates for the remainder of 2013-14 and its initial estimate for 2014-15. With General Fund revenues already a half a billion dollars short through April, it was expected by many budget watchers that revenue projections would be scaled back. The IFO forecasts a decrease of revenue of $568 million from official estimate for 2013-14 and for 2014-15, predicts a further decline of $768 million from the Governor’s Office estimates from February. This jeopardizes the increases proposed by the Governor for 2014-15, and could lead to budget cuts from 2013-14.

Governor Corbett’s budget proposal was already build on a fragile base, and with the IFO report, that foundation has crumbled. Back in February, Governor Corbett’s proposed 2014-15 budget projected ending 2013-14 assumed that revenue for the current year would meet estimates. The 2014-15 budget would increase spending by $825 million, but relied on optimistic revenue growth for next year (4.9%) including $225 million that was being transferred into the General Fund from other funds.

The new IFO figures scale back overall revenue growth to 3.5%, and overall tax growth in 2014-15 to 3.3%. These figures do not include the Governor’s proposed transfer of $225 million into the General Fund, as they have not been enacted into law.

Table 1 . IFO Lowers Revenue by $1.3 Billion

(in $ billions)

2013-14

2014-15

Two Year Change

Governor’s Budget (February)

$29.116

$30.315

 

IFO (May)

$28.548

$29.537

Change from Governor

-$0.568

-$0.778

-$1.346

Percent Change from Governor

-2.0%

-2.6%

-2.3%

Note. Figures do not include proposed transfers of $225 million in 2014-15.

A more complete comparison of General Fund revenue estimates can be found in Appendix 1.

Major changes in the revenue forecast for 2013-14

Since we are ¾ of the way through 2013-14, projecting shortfalls from estimate isn’t exactly a shot in the dark. In total, the IFO is projecting revenues to fall $568 million short of estimate in the fiscal year, a shortfall of 2%. Major estimate reductions for 2013-14 include:

  • Personal income tax -$275 million -2.3%
  • Corporate net income tax -$101 million -3.9%
  • Capital stock and franchise tax -$58 million -14.8%
  • Sales tax -$54 million -0.6%
  • Bank taxes -$47 million -14.3%

Personal income tax collections are predicted to fall short of estimate in 2013-14 largely because a dramatic, but not unforeseen, decline in investment income claimed in 2013 compared to 2012. This resulted in lower “non-withheld” tax collections in April 2014 as personal income tax returns for last year were filed. ). Federal tax rates, as part of the deal to end the sequester, were increased on investment income in tax year 2013. To reduce their federal tax bills, many high income taxpayers recognized investment income in tax year 2012 to avoid having to pay higher rates in following years. This resulted in a one-time increase in non-withheld tax payments for 2012 (largely received in April 2013). Pennsylvania, like some other states, expected only a modest decline in these payments in the following year, but the impact was much larger than originally projected. Tax payments on investment income are expected to return to normal on 2014 tax returns (much of which would be paid in 2014-15).

Corporate tax receipts were also not as strong as predicted due in part to recently enacted tax changes. Bank taxes, in particular, were “reformed” in the 2013-14 budget deal where the tax base was broadened and the tax rate was cut. This change was supposed to be “revenue neutral,” meaning it would yield the same amount of tax revenue as before the change, but so far, banks have paid quite a bit less than last year. The IFO expects by year end, banks will have paid $46 million, or 14% less than was projected for 2013-14.

Sales tax collections continue to grow, but not at the rate expected. For several years since the end of the recession, sales tax receipts have been expected to rebound as the economy improves. Growth in 2013-14 receipts shows the rebound continues to be more muted than predicted.

Lowered expectations for 2014-15

Lower than expected 2013-14 revenues generally translates into lower expected revenues for 2014-15. Almost across the board, the IFO projects lower tax collections of various types than the Governor’s February projections. In total, tax revenues are projected by the IFO to be $779 million, or 2.6% lower for 2014-15 than the earlier estimate.

Notable changes for 2014-15 from the Governor’s February estimates:

  • Personal income tax -$339 million -2.7%
  • Capital stock and franchise tax -$87 million -26.6%
  • Corporate net income tax -$78 million -3.0%
  • Small games of chance -$77 million -75.5%
  • Bank taxes -$65 million -18.4%

The IFO projects continued economic growth in 2014-15, however, the growth is less robust than the Governor’s estimates in February. Personal income tax is projected to grow by 5.1% in 2014-15 rather than the 5.5% growth included in the Governor’s budget.

The IFO is predicting a more dramatic drop in capital stock and franchise tax revenue as rates continue to be cut. The CSFT rate has been cut from 2.89 mills to 1.89 in 2012, 1.89 mills to 0.89 mills in 2013, and 0.89 mills to 0.67 mills in 2014. If no changes are made to current law, the rate will be cut from 0.67 mills to 0.45 mills in 2015 and from 0.45 mills to 0 mills beginning in tax year 2016.

The corporate net income tax forecast is reduced due to lower profit growth expectations, recent tax law changes, and the lingering effects of 100% bonus depreciation.

Without some type of law change, the IFO expects bank taxes problems that came to light in recent months to continue. For 2014-15, the IFO forecasts $65 million, or 18%, less in in bank tax collections than the Governor’s February projections.

Taxes from small games of chance were also scaled back by the IFO based on the slower than expected adoption of small games of chance terminals by taverns. [1] The Governor’s budget projected over $100 million in small games of chance taxes being collected in 2014-15. Based on the lack of demand, the IFO has reduced that to $25 million – a cut of over $75 million.

Conclusion

The IFO’s reduced revenue forecast for 2013-14 and 2014-15 underscore the ongoing need for additional revenue sources. Without new revenue, $1 billion or more will be cut from Pennsylvania schools, hospitals, and human service providers. This will result in the loss of jobs and a further drag on our state economy.

There are sensible revenue and cost saving options available for state policy makers- including a severance tax on natural gas, smokeless tobacco taxes, and the immediate expansion of Medicaid.




[1] Jeff Frantz, “Pa. expected thousands to want small games of chance licenses. Six do. That’s a problem.” The (Harrisburg) Patriot-News, February 19, 2014, http://www.pennlive.com/midstate/index.ssf/2014/02/pa_state_budget_small....

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