Modest General Fund Revenue Growth Forecasted for 2013-14

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Total General Fund Revenue Projected to Grow by 1.6% in 2013-14General Fund revenue collections are projected to grow very little in the 2013-14 fiscal year.[1] Tax revenue is projected to have the smallest rate of growth since the 2009-10 fiscal year — driven in part by years of corporate tax cuts. Low revenue growth likely means the commonwealth will be treading water in the coming year, with General Fund spending barely matching the inflation-adjusted buying power of the 2012-13 budget.[2] With pension obligations growing at a faster rate than inflation, this revenue outlook leaves fewer dollars for Pennsylvania classrooms, health care, and other critical services.

General Fund revenue collections in 2013-14 are projected to be $29.1 billion, about $469 million, or 1.6%, more than in 2012-13. This projected revenue growth is less than the commonwealth recorded in 2012-13 but better than receipts in either 2010-11 or 2011-12.

General Fund taxes, which make up 98% of all General Fund collections, are expected to total $28.6 billion in 2013-14 — a projected increase of 2%, or an additional $560 million. Taxes Expected to Provide Little Additional General Fund Revenue for 2013-14It would be the smallest growth in tax collections for Pennsylvania since the 2009-10 fiscal year.

Personal income tax growth is expected to be modest, while estimates put sales tax collections, after a lackluster 2012-13, on track for a rebound in 2013-14.

While the slow improvement in the U.S. economy has a hand in this modest outlook, policy decisions in Harrisburg are also playing a role. The Governor proposed a large long-term cut in state business taxes as part of his 2013-14 budget that did not make it into the final plan. Still, a number of other tax cuts and changes were enacted.

New corporate tax cuts, including another reduction in the capital stock and franchise tax rate, will result in a 4% decline in corporate tax revenue in 2013-14 from 2012-13 – contributing to the overall slow growth in tax collections this year.

 

Personal Income Tax Growth in 2013-14 Projected to Lag Recent YearsModest Growth Projected for Personal Income Tax

Personal income tax (PIT), the state’s largest single revenue source, is expected to grow modestly in 2013-14. Collections are pegged at $11.7 billion — 3.1%, or $356 million, more than in 2012-13. In times of hearty economic expansion, PIT growth can be much higher — in the 5% to 6% range.

PIT growth in 2012-13 was likely exaggerated by a change in federal tax policy. Many high-income taxpayers likely paid state and federal income taxes on gains from stocks, bonds, and other long-term investments before higher federal income tax rates on top earners took into effect in January 2013. Investment holders have a lot of discretion over when they pay income taxes on such investment gains, so it is unlikely that Pennsylvania will see a similar bump in collections again this coming fiscal year.

Sales Tax Rebound Projected in 2013-14A Sales Tax Rebound

After a lackluster 2012-13, sales tax collections are projected to grow by $335 million, or 3.8%, to $9.2 billion in 2013-14.

It is unclear why state budget forecasters expect sales tax collection growth to more than double from the previous year — particularly with PIT growth projected to be 0.7 percentage points lower than sales tax growth and so much of our economy based on consumer spending.

Such growth would mark a rebound from 2012-13 sales tax collections, which failed to meet targets in every month but one. Sales tax collections for the year fell $326 million, or 3.5%, short of estimates.

Corporate Tax Collections Expected to Decline

An Erosion of Corporate Tax Collections Is Projected for 2013-14Corporate tax collections will decline by 4% from 2012-13 to 2013-14. This is driven by new corporate tax cuts, including another reduction in the capital stock and franchise tax rate.

Corporate net income tax (CNIT) collections can fluctuate dramatically with changes in corporate profits and the overall economy. In 2013-14, CNIT receipts are expected to total $2.48 billion, an increase of $55 million, or 2.3%. This modest growth follows a 20% jump in 2012-13 CNIT collections. With such a high-growth rate in 2012-13, more moderate growth this fiscal year is to be expected.

An unknown amount of the decline in CNIT collections in 2011-12 and the increase in 2012-13 is due to the Corbett Administration’s adoption of a temporary federal policy known as 100% bonus depreciation. This policy change, enacted for a period from late 2010 through 2011, allowed businesses to write off the cost of equipment in the year of acquisition rather than stretching it out over a period of years as is normally done. This policy would have reduced CNIT collections in 2011-12 and increased them in subsequent years.

New tax changes enacted along with the 2013-14 budget will likely reduce net CNIT collections by a modest amount — $5 million, according to the House Republican Appropriations Committee. These changes include an increase in the limit placed on the amount of net operating losses a business can apply to future years' profits in order to reduce taxes.

The approved 2013-14 budget delayed a plan to eliminate the capital stock and franchise tax (CSFT) next year, preserving needed revenue to balance the 2013-14 and 2014-15 budgets. But it also included further cuts to the CSFT rate in 2014 and 2015 that will continue to reduce collections. In 2013-14, the CSFT is expected to collect $320 million, or $282 million (47%) less than was collected in 2012-13.

Corporate Net Income Tax Growth Expected to Slow Down in 2013-14 Cut to Capital Stock and Franchise Tax Rate Expected to Erode Collections Further in 2013-14

Over Time Corporations Pay a Smaller Share of General Fund Taxes

Other Notable Points

A few other notable points about the 2013-14 revenue projections include:

  • There are projected increases in table game and beer taxes in 2013-14, despite a decline in both tax streams in 2012-13.
  • Financial institution taxes are expected to moderate in 2013-14 after two years of double-digit growth. In this category is the bank shares tax. Its rate was cut from 1.25% to 0.89%, while the tax base was expanded in a move that is expected to be essentially revenue neutral.
  • Liquor taxes are projected to increase by 5.1% from 2012-13 within the existing state-store system.

In mid-August, the Pennsylvania Department of Revenue will release the official distribution of revenue collections for 2013-14, allowing for monthly tracking of revenue targets. The Pennsylvania Budget and Policy Center will post monthly Revenue Trackers analyzing the state's monthly revenue reports. 

ENDnotes

[1] 2013-14 Official Revenue Estimate, Pennsylvania Department of Revenue, certified July 18, 2013.

[2] The Consumer Price Index increased by 1.8% from June 2012 to June 2013. Consumer Price Index – 2013, Bureau of Labor Statistics, July 16, 2013, http://www.bls.gov/news.release/pdf/cpi.pdf.