Pa. Exceeds Revenue Estimates in First Quarter

October 5, 2010

Revenue collections during the first quarter of the 2010-11 Fiscal Year are nearly $76 million above estimates. In September alone, receipts exceeded projections by nearly $70 million.

While this is a positive sign, several factors could still prolong the state’s revenue crisis.

The Case for Optimism

September’s above-estimate revenue collections are a positive sign for several reasons, including:

• September is a typically a larger revenue month as quarterly corporate and personal income tax returns are due.
• During the first quarter of 2010-11, General Fund collections exceeded estimate for the first time since early in the recession.
• In September, the three major categories of tax (personal income tax (PIT), sales tax, and corporate taxes) exceeded estimate, although PIT exceeded estimate by a tiny amount.
• Sales tax collections have exceeded estimate each month this year – an indication that consumer and business spending may be recovering.
• Corporate taxes were $53 million, or 12%, over estimate. Business taxes often rebound from an economic downturn more quickly than other revenue sources, so it may be confirming that the recovery has begun in Pennsylvania.
• Taxes on cigarettes, beer, liquor, and table games continue to outperform expectations.  For the fiscal year, they are 2.4% higher than expected.
• Tax collections for the fiscal year are $315 million, or 6%, higher than they were through the first quarter of 2009-10.
  

Pa. General Fund Surplus/Deficits Over Time

Don’t pop open the corks quite yet…

Still, fiscal year-to-date collections are a mixed bag, with only four of seven major revenue streams exceeding estimate (including two that are only slightly ahead of estimate). Overall, first quarter revenue receipts show a very modest surplus that could disappear as the year goes on.

 
There are a couple factors that could prolong the recession-driven revenue crisis that has hit Pennsylvania.

Pennsylvania’s largest single revenue source, the personal income tax (PIT), is still falling slightly short of estimates. The 2010-11 revenue estimates projected a modest 1.5% growth in PIT collections from depressed 2009-10 levels. So far, collections haven’t kept up with estimates, falling $11 million, or 0.5%, short for the fiscal year. With unemployment rates expected to remain high and  investment performances still shaky, it is unlikely that PIT collections will be roaring back anytime soon. 

Corporate tax payments can be notoriously volatile, as each corporation sets and revises its tax estimates over the course of a year. The impact of these decisions is often seen later in the fiscal year. When companies believe they have paid more than is necessary, they will often substantially reduce March and April payments. If many companies do this, the surplus that has accumulated could easily disappear.  Quarterly payments in December should shed more light on the profitability of corporations.

Realty transfer taxes are down almost a fifth (19%) from expectations. This tax represents only about 1% of total General Fund collections, but provides a measure of the health of the economy.  Some of the loss of realty transfer tax revenue this year is likely due to the expiration of the federal homebuyer tax credit program in late 2009-10, which accelerated home purchases at that time.

Strong severance tax needed to avert further cuts in 2010-11 budget

After the 2010-11 state budget was signed in July, Congress approved enhanced federal FMAP funding to the states that appropriated less funding to Pennsylvania than the budget anticipated.

Governor Rendell rebalanced the budget using $212 million in cuts coupled with an expected $70 million in revenue from an ”agreed to in principle” severance tax.

On September 29, the state House of Representatives approved a severance tax bill (SB 1155), two days before the Legislature’s self-imposed October 1 deadline. The bill now faces an uncertain fate in the state Senate.

The Senate should keep its promise and enact a strong severance tax that provides at least $70 million to the General Fund in 2010-11. Based on the revenue performance of the first quarter of 2010-11, it seems unlikely that a substantial revenue surplus will be able to fill the $70 million gap. Without revenue from a severance tax, Pennsylvania will likely face yet another round of cuts to early childhood education, libraries, state parks, services for seniors, and care for people with disabilities.