Revenue Tracker: Tax Revenues Up Over Last Year, But Corporate Collections Disappoint

January 19, 2012

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Midway through the 2011-12 Fiscal Year, Pennsylvania continues to see an increase in revenue collections over last year, with growth in all tax streams except corporate collections. Despite that year-over-year growth, revenues are trailing Corbett administration estimates so far this year, prompting the administration to announce midyear budget freezes this month. Weak corporate collections are taking a toll, and it appears likely that Pennsylvania will end the year with a revenue shortfall, despite solid growth from 2010-11. Still, the revenue picture, in the short term, may not be as dire as that painted by the Corbett administration. The state is carrying a half a billion dollars in reserve that more than covers the current shortfall.

Year-to-date tax collections as of December are up $398 million, or 3.6%, over this point last year, but are falling short of Corbett administration estimates by $466 million, or 3.9%. Total revenue collections are $487 million, or 4%, below estimates.

Year-over-year growth slowed in December with monthly tax collections outpacing those a year earlier by only $6.5 million, or 0.3%. Some of this slowdown has to do with a shift in the timing of sales tax payments, but weak corporate collections are also having an impact.

Changes to the revenue estimate itself may be playing a role in the shortfall, as well. The administration projected a larger share of revenue collections in the first half of the year and a smaller share in the second half than has been the case in recent fiscal years. That may have contributed to the midyear shortfall and could set the stage for a stronger revenue showing between now and June.

Actions taken by the Corbett administration and the General Assembly have also contributed to the current revenue shortfall. The decision last year to allow corporations to accelerate depreciation costs may be costing more than originally estimated, while doing little to improve the economic outlook. That, combined with the continued phase-out of the capital stock and franchise tax in 2012, will cost the state hundreds of millions of dollars in lost revenue.

An Important Revenue Month

December is typically an important month for Pennsylvania tax collections, particularly for corporate and sales taxes. Many companies make estimated quarterly tax payments in December for both corporate net income and capital stock and franchise taxes. Much of the sales tax collected from holiday shopping comes in December, and the holidays typically bring liquor tax collections to their annual zenith.

Corporate tax collections were the primary issue in December, as they have been for much of the year. December corporate collections fell $92 million, or 17% short, of estimate. Pennsylvania’s two largest taxes missed December targets by more modest amounts — personal income tax by $37 million, or 4.4%, and sales tax by $4 million, or 0.6%. Non-tax revenues were $15 million lower than expected.

Other major tax types (inheritance, realty transfer, and taxes on alcohol, tobacco, and table games) slightly exceeded revenue estimates in December.

Troubling Decline in Corporate Taxes

Pennsylvania has seen corporate tax collections fall severely short of estimates over the first six months of the 2011-12 Fiscal Year. So far, they are $259 million short of estimate, which equates with an astounding 17.6% shortfall from revenue targets. In fact, corporate taxes, which were expected to make up less than one-fifth (18%) of all General Fund dollars, are responsible for over half (53%) of the state’s $487 million revenue deficit.

Corporate tax collections are down $17 million, or 3.6%, from what was collected during the first half of 2010-11. This comparison will likely get worse in the months ahead, as the capital stock and franchise tax rate has been reduced from 2.89 mills to 1.89 mills (a 35% reduction), and corporate tax collections are not expected to be as high in March and April 2012 as they were in those months last year.[1]

Pennsylvania is not alone in seeing lackluster corporate tax collections. Federal reports show the same trend, despite healthy corporate profits (see chart from The Wall Street Journal). Since Pennsylvania’s corporate income taxes are based on federal taxes, it’s no surprise that a decline of federal receipts is being felt in the Commonwealth, too.  However, Pennsylvania seems to be in worse shape than neighboring states.[2]

Pennsylvania Policy Choices Make the Difference

A number of other factors are likely adding to Pennsylvania’s corporate tax revenue woes.
The slow economy may be having an effect. If corporations are feeling pessimistic about the future, they could be reducing their estimated tax payments now.  They could also be paying less in anticipation of the capital stock and franchise tax rate cut this year.  Pennsylvania’s leaky corporate tax system gives multi-state corporations a lot of leeway to decide how much they will pay in corporate tax payments.

Another factor may be the Corbett administration’s decision to allow 100% bonus depreciation in tax year 2011.[3]  Cost estimates for this tax cut ranged from $100 million to $400 million in 2011-12. It will not be possible to determine the actual cost of this until final returns are filed for tax year 2011 – which could be well after the end of the fiscal year.

Another issue involves the revenue estimate itself. A larger share of corporate receipts was predicted to be collected in the first half of 2011-12 than had been seen in previous fiscal years. The official revenue estimates forecasted that 29.8% of all corporate taxes would be paid in the first six months of the fiscal year. This would have been the largest portion of corporate tax revenue to come in during the first half of the fiscal year since before 2006-07. Some of the shift was due to expectations at the time of the budget’s passage that 2011 was going to have stronger growth, followed by more muted growth in 2012 (the opposite now seems to be the thought). It was also based on the experience of 2010-11, when a large share of one-time corporate tax payments came in during the second half of the fiscal year.

Conclusion

In response to the current revenue shortfall, the Corbett administration has made $157 million in budget freezes to a variety of state services and operations.  This means more painful cuts to schools, protecting the environment, and health care.

These cuts may be premature at this point. The Commonwealth has half a billion dollars in reserve that more than covers the current shortfall. We should also pay close attention to how revenues are performing in the coming months.

Finally, the Commonwealth must act responsibly in the fiscal decisions it makes in 2012. The Corbett administration has announced plans for further tax reductions in the coming budget. It would be more fiscally responsible for the Commonwealth to delay tax cuts that have had little success in spurring growth, while maintaining its commitment to children and families and to services that do foster growth.  Cuts have real impacts on our economy. Fewer teachers, police, nurses, and social workers mean less money in our economy and less fuel for our recovery.

Footnotes

[1] According to the Department of Revenue, a number of large, one-time payments were made in March and April of 2011. They do not believe that a similar event will occur in 2012.

[2] Through December, New York business taxes are running 6.4% ahead of the previous year. New Jersey’s corporate taxes had grown by 4.4% from the prior year as of November 2011, but were down 5.5% from estimates for the current year. As of the end of November, Maryland’s corporate net income tax collections were 8.9% higher than the previous fiscal year.

[3] Details can be found here: http://www.revenue.state.pa.us/portal/server.pt?open=18&objID=1097834&mo....