With Revenue Shortfall Eclipsing $1 Billion in April, More Cuts Likely, New Revenue Needed

Revenue Tracker

May 5, 2010

At a critical time for crafting next year’s state budget, General Fund revenue collections, still battered by the recession, pushed Pennsylvania’s budget shortfall above $1 billion in April.

April revenues came in $390 million, or 11.8%, below estimate. For the 2009-10 fiscal year, actual General Fund collections have fallen $1.1 billion, or 4.6%, short of projections.

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With only two months remaining in the fiscal year, it seems likely that the state will carry over a deficit into 2010-11, adding yet another cloud to what is likely to be a difficult budget.

Few positive signs can be taken from the April revenue report. The monthly deficit was the largest seen in 2009-10. The state’s three major sources of tax revenue (personal income tax, sales tax, and corporate taxes) fell a combined $303 million short of estimate during the month. Non-tax revenues, too, failed to meet expectations, by almost $100 million, although that is primarily due to delays in the payment of one-time table game license fees that casino operators are required to pay by June 1. Still, the widely distributed revenue shortfall casts doubt on the strength of the economic recovery in Pennsylvania – and expectations for revenue in the coming fiscal year. 

Income Tax Shortfall Nearly Doubles During April

With annual Personal Income Tax (PIT) returns due for most people on April 15, more PIT dollars are collected in April than any other month. In April 2010, PIT collections fell $129 million, or 8.4%, short of estimate. This nearly doubles the PIT shortfall for the fiscal year, which now stands at $265 million, or 3.1% (see Figure 2).

Governor Ed Rendell said that withheld income taxes (which are taken out of people’s paychecks) were slightly higher than anticipated in April. This may be an indication that employment in the state has finally begun to stabilize.

The monthly PIT shortfall, however, was due to lower than expected non-withheld income tax payments (those coming from tax owed on business earnings, interest, dividends, and taxes due with April 15 return filings). The Rockefeller Institute reports that at the federal level, non-withheld income tax payments across the U.S. were down 17.6% in April 2010 from the previous year. Bad news at the federal level likely means that non-withheld PIT collections in Pennsylvania will be lower than expected going into the new fiscal year.

Corporate Tax Collections Fall Well Below Expectations

Corporate tax collections were off significantly from estimates in April, falling $147 million, or 25%, short. For the fiscal year, corporate tax collections are now $431 million, or 9.8%, lower than estimate.

Despite only accounting for 17% of all General Fund collections, corporate taxes account for 39% of the overall shortfall. Since many companies make estimated quarterly payments in April, collections this month serve as a barometer for business profits. A shortfall of the magnitude seen in April may mean that businesses are still struggling to earn profits in the wake of the recession, or are more able to reduce their tax payments with carried-over losses generated earlier in the recession.

Other Collections

Sales tax collections have missed the mark every month this fiscal year, and April was no different. Collections were $27 million, or 3.6%, below estimate. For the fiscal year, sales tax collections trail estimates by $343 million, or 4.9%.

Non-tax collections were $96 million, or 36.8%, lower than expected in April. According to the Rendell Administration, this is due to a delay in $100 million in table game license fees that were expected to be received in April. The fees are expected to be received before the end of the fiscal year, easing some concerns about this shortfall.

Taxes on cigarettes and alcohol, real estate transfers, and inheritances came in $9 million, or 4.5%, higher than estimate. These taxes, in total, accounted for 7.3% of April collections.

Conclusion

Continued sluggish tax collections indicate that service cuts and layoffs are highly likely in the next two months. They also make it likely that the Legislature will have to closely re-evaluate revenue projections for the coming fiscal year, as the recession continues to batter state tax collections across the nation.

In his 2010-11 budget plan, Governor Ed Rendell proposed a number of new revenues to help fund the 2011-12 budget, when federal recovery dollars for the state disappear. Due to lagging tax collections in the current year, Pennsylvania may need these funds to help balance the 2010-11 budget.

While some lawmakers have renewed calls for deep cuts to services, Pennsylvania needs a more balanced approach that includes revenue measures, as well as savings and efficiencies, so that the Commonwealth can continue to invest in Pennsylvania's economy, its young people and its future during this prolonged recession.

Enacting a severance tax on natural gas extraction and an excise tax on other tobacco products could raise revenue immediately, as could the elimination of the antiquated sales tax vendor discount. Eliminating corporate tax loopholes could help increase collections later in the coming fiscal year – and raise needed revenue for many years to come.

Adding these revenues are critical to taking a balanced approach to the budget crisis that limits deep cuts to education, health care, and public safety programs, as well as layoffs of thousands of Pennsylvanians.

Furthermore, well-respected financial analysts at Moody’s and Economy.com have indicated that massive state budget cuts due to anemic tax collections could push the U.S. back into recession by pulling money out of the economy and adding to the unemployment rolls.