Revenue Tracker: January Close to Revenue Targets But Corporate Taxes Continue to Lag

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Overview

Pennsylvania’s revenue performance has been uneven this fiscal year due in part to a stubbornly slow growing economy and to policies that have cut the tax bills of big profitable corporations. After months of significant revenue shortfalls, however, January provided some hope.

General Fund collections came in close to estimate in January – falling $10.2 million, or 0.5%, short of monthly targets. This is a marked improvement over the previous several months, when revenues fell between 3% and 6% short of estimate. January is an uneventful month for most revenue streams. Personal income tax collections are the exception, coming in greater in January than every other month except April, when tax returns are due. Corporate collections continued to fall significantly short of estimate in January and account for more than half of the General Fund’s revenue shortfall so far in 2011-12.

Revenue collections for the 2011-12 Fiscal Year are $497 million, or 3.5%, below the Corbett administration’s revenue estimates. The administration is now projecting a year-end revenue shortfall of $719 million, although the Independent Fiscal Office (IFO) believes this to be too pessimistic, based on recent economic trends. The IFO expects the year-end shortfall to be in the $500 million range.

Strong Sales Tax Collections in January

January collections were driven by stronger-than-anticipated sales tax collections – likely buoyed by improving auto sales – and inheritance tax collections. Sales tax collections exceeded estimate by $65 million, or 8.8%, for the month, and are outpacing year-to-date estimates by $42 million, a little less than 1%.

PIT collections came in $46 million, or 4.1%, short of estimate in January. There was some positive news: withheld PIT (largely from paychecks) exceeded estimate for the first time in January since July 2011. This was tempered by non-withheld PIT (quarterly tax payments), which came in $49 million, or 12.6%, below estimate. January is typically the second largest month (after April) for non-withheld PIT collections. For the fiscal year, PIT is running $211 million, or 3.6% below revenue targets.

Estimate to Actual, Fiscal Year 2011-12: TOTAL REVENUE COLLECTIONS
(in $ thousands)
  Jul 11 Aug 11 Sep 11 Oct 11 Nov 11 Dec 11 Jan 11
Estimate $1,720,236 $1,869,000 $2,474,800 $1,873,300 $1,782,700 $2,411,900 $2,181,200
Actual $1,720,192 1,805,916 2,322,959 1,806,201 1,719,436 2,270,389 2,171,000
Monthly Difference ($44) (63,084) (151,841) (67,099) (63,264) (141,511) (10,200)
Cumulative Difference ($44) (63,128) (214,969) (282,068) (345,332) (486,843) (497,043)
Fiscal Year-to-Date Percent Difference from Estimate -3.5%

Tax Collections Slow in January But Remain Ahead of 2010-11

Tax collections in January were $72 million, or 3.2%, lower than in January 2011. Total tax collections for the fiscal year so far have grown by $326 million, or 2.4%, over the same period in 2010-11. Every major tax category except corporate taxes has shown positive growth in 2011-12.

Comparison to Fiscal Year 2010-11: TOTAL REVENUE COLLECTIONS
(in $ thousands)
  July August September October November December January
Actual FY 2010-11 $1,693,246 1,806,356 2,315,225 1,756,272 1,592,039 2,291,268 2,242,883
Actual FY 2011-12 $1,720,192 1,805,916 2,322,959 1,806,201 1,719,436 2,270,389 2,171,000
Monthly Difference $26,946 (440) 7,734 49,929 127,397 (20,879) (71,883)
Cumulative Difference $26,946 26,506 34,240 84,169 211,566 190,687 118,804
Fiscal Year-to-Date Percent Difference from 2010-11 0.9%

Corporate Tax Shortfall Continues

January is not a particularly important month for corporate tax collections. Still, corporate collections fell significantly short of estimate in January, coming in $27 million, or 22%, below expectations. For the fiscal year, corporate taxes are $287 million, or 18%, short of estimate. This accounts for 58% of the General Fund’s revenue shortfall so far in 2011-12.

Matthew Knittel, the Independent Fiscal Office director, said a February 2011 policy decision by the Corbett administration to adopt federal “bonus depreciation” is likely playing a role in underperforming corporate tax revenues. Bonus depreciation is a federal tax incentive that allows 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 up-front write off reduces a business’s current taxable income – and the taxes it pays on the income. States like Pennsylvania that allow bonus depreciation see their corporate income tax collections temporarily decrease due to these equipment purchases – even though there is no requirement that the equipment be used in a particular state.

Initial estimates from the administration were that bonus depreciation would cut tax collections by roughly $200 million ($69 million in 2010-11 and $132 million in 2011-12), but that appears to substantially understate the cost. Knittel testified recently to the Senate Appropriations Committee that the cost could range from $300 million to $350 million based on existing data but that the state will not know definitively until updated tax data is available next year.

Corporate Tax Collections (In $ Millions)
  July to Jan Full Fiscal Year Pct of Total
2006-07 $1,690 $5,476 30.9%
2007-08 $1,679 $5,458 30.8%
2008-09 $1,466 $4,834 30.3%
2009-10 $1,201 $4,579 26.2%
2010-11 $1,336 $4,892 27.3%
2011-12 estimate $1,593 $4,925 32.4%
2011-12 actual $1,307 ?? ??
Note 2011-12 Full Fiscal Year figure is the administration's estimate and % of total is the actual figure through January compared to the year-end estimate.

On top of the adoption of bonus depreciation, the capital stock and franchise tax rate decreased from 2.89 mills to 1.89 mills beginning in January. The rate cut will begin reducing corporate revenues in March when quarterly payments are due for many corporate taxpayers.

The 2011-12 estimate for corporate taxes had an unusually large share of the tax expected to be collected in the first part of the fiscal year. If stronger-than-expected payments are made in March and April, the corporate tax shortfall may be lessened. However, given the magnitude of the corporate tax shortfall so far, it seems unlikely that it will be made up fully this fiscal year.

Non-tax Revenues Missing Estimate

Collections of non-tax revenue, which includes liquor store profits, licenses, fees, penalties, interest, unclaimed property, and transfers from other funds, fell noticeably short of estimate for the third month in a row. In January, non-tax revenue collections were $6.6 million short of estimate and are $27 million, or 17%, below estimate for the fiscal year. $20 million of the $27 million shortfall is due to lower-than-expected unclaimed property income.

Conclusion

Comparing revenue estimates to actual collections tells only part of the story of Pennsylvania’s fiscal performance. Most tax revenue has been growing over the previous year, but not quickly enough to offset the cost of business tax breaks like bonus depreciation.

To make matters worse, Governor Corbett has proposed a state budget that moves Pennsylvania in the wrong direction. His budget maintains deep cuts to public schools that hit the poorest districts the hardest. It sharply reduces funding to public universities that could stifle innovation and drive up college tuition when many families can least afford it. Rather than closing tax loopholes and ending special tax breaks, the budget is balanced by cutting health care for children and adults.

Pennsylvania came out of the recession strong, ranking among the top 10 states in job growth. Our unemployment rate was a point lower than the national average and we were making investments in our schools, hospitals, and workforce that were creating real jobs. We have since reversed course – increasing class sizes, limiting access to care, and cutting workforce training opportunities. As a result, we have seen our job growth advantage slip. Pennsylvania actually created more new jobs in 2010 than in 2011, thanks to policies that resulted in 13,000 teachers and school staff losing their jobs. If we continue on this course, Pennsylvania will be more likely to fall behind our competitors as the economy grows.