Big Shortfall in January Brings State Revenue Deficit to $374 Million

Revenue Tracker

February 2, 2010

January marked a significant shortfall in General Fund revenue collections for the Commonwealth, bringing the fiscal year-to-date deficit to $374 million and raising doubt about Rendell Administration targets for the remainder of the year.

Collections in January fell short of estimate by $120 million, with 85% of the shortfall due to lower-than-expected collections from the state's two largest tax streams – the personal income tax and the sales tax. Only “sin taxes” on tobacco, liquor, and beer exceeded monthly estimates for the month.

With five months remaining in the fiscal year, January collections are raising doubts about a December estimate from Governor Rendell’s Administration that the Commonwealth would end the 2009-10 Fiscal Year in June with a revenue shortfall of $450 million.

Compared to January 2009, General Fund revenue collections are $52 million, or 2.4%, lower in January 2010.  For the fiscal year-to-date, tax collections in 2009-10 are $366 million, or 2.8%, lower than they were at this point in 2008-09. 

Last fiscal year, revenue collections began to plummet in late 2008, growing worse over the second half of the fiscal year. With the addition of $2 billion in one-time revenue in 2009-10, total revenue collections as of January 2010 are not unexpectedly ahead of collections from the previous fiscal year.

PIT, Sales Tax Miss Mark

Revenues fell short of estimate in January for both of the state’s two major taxes – the sales tax and the personal income tax (PIT).

Sales tax collections, which are normally the highest of the fiscal year in January (due to holiday shopping), missed their monthly target by $50 million, or 5.9%.  For the fiscal year, sales tax collections are $231 million, or 4.6%, lower than expected. Sales tax collections have fallen short of estimate every month of 2009-10 – indicative of a slower-than-expected economy and weaker-than-anticipated consumer confidence.

PIT collections were also below anticipated levels in January. PIT collections were $52 million, or 4.7%, lower than the monthly estimate. Fiscal year-to-date, PIT collections are $163 million, or 3%, lower than anticipated.

Both PIT and sales tax collection deficits for January came in at larger percentages than the fiscal year-to-date deficits, which may indicate collections are getting worse, rather than better. 

Modest Month for Other Revenue Streams

January tends to be a modest month for collections of the General Fund’s other revenue sources. Corporate taxes fell short of estimates for the second straight month, pushing the yearly shortfall to $4 million, or 0.3%, of estimate. Both inheritance tax and realty transfer tax collections showed large shortfalls in January, falling 16% and 29%, respectively, short of the monthly target. This follows three straight months in which these taxes exceeded estimates.

Non-tax revenue receipts also fell short of estimate in January, in a month not expected to contain significant non-tax revenue collections. 

Common-sense Revenue Measures

Continued lagging revenues may complicate what is expected to be a difficult 2010-11 budget negotiation process, as federal recovery funds are expected to decline. It may also require additional reductions in services in 2009-10 if new revenues are not considered to address the revenue gap.

Enacting common-sense revenue-raising proposals, including the enactment of a severance tax on natural gas production and an excise tax on smokeless tobacco and cigars, and the elimination of the antiquated sales tax vendor discount, may help avert more painful cuts in 2009-10 and provide a more solid fiscal base for 2010-11.