Revenues higher than expected in first half of 2014-15, but new tax cuts loom

December revenue collections were better than expected, coming in $162 million higher than the December revenue target. This pushes the 2014-15 revenue surplus to $271 million, or 2.1%.

While having more money is better than having less money when trying to balance the state budget, the current 2014-15 revenue surplus pales in comparison to the $2 billion shortfall projected for 2015-16.

A number of business tax cuts went into effect Jan. 1, 2015, which will likely reduce corporate tax revenue in the second half of 2014-15 and have an even larger impact in 2015-16. These cuts include another reduction in the capital stock and franchise tax rate and expansion of  corporations’ ability to lower their income tax bills by using past losses to reduce current profits.

So far, so good, but…

December tax collections were higher than most monthly revenue targets. Collections from the state’s three largest sources --- personal income, sales, and corporate taxes -- were all higher, overall, than estimates. These three categories accounted for more than 90% of the surplus in December. December’s strong results more than doubled the surplus for the fiscal year.

A closer examination shows that the sales tax surplus was driven by vehicle sales, while sales tax collections on everything else actually fell slightly below estimated for the month. Personal income tax withheld from wages and salaries was only a small fraction of the monthly surplus. Of the $25 million surplus, $23 million came from higher-than-expected non-withheld tax payments. (Some of this is likely investment-related income bouncing back from 2013 due to federal tax changes).

Finally, corporate tax collections were $76 million, or 15.9%, higher than estimated for the month. This appears to be due to higher-than-expected quarterly corporate net income tax payments. Many companies “settle” their 2014 tax bills in March. Until this occurs, estimated payments should be viewed as what they are, only estimates. Such “surpluses” can quickly evaporate when tax returns are filed.

 

2014-15 Revenue Collections Compared to Estimate

(in $ thousands)

December 2014

Actual

Estimate

Over/(Under)

%

Sales Tax

 $          804,200

 $                      793,900

 $           10,300

1.3%

Personal Income Tax

          1,020,000

                         994,700

              25,300

2.5%

Corporate Taxes

             564,200

                         486,700

              77,500

15.9%

Inheritance Tax

               72,100

                           79,500

               (7,400)

-9.3%

Realty Transfer Tax

               40,400

                           34,300

                 6,100

17.8%

Other Taxes: Cigarette, Malt Beverage, Liquor, and Table Games

             146,600

                         134,600

              12,000

8.9%

Total Tax Revenue

 $      2,647,500

 $                  2,523,700

 $         123,800

4.9%

Non-Tax Revenue

               63,200

                           25,200

              38,000

150.8%

Total General Fund

 $      2,710,700

 $                  2,548,900

 $         161,800

6.3%

 

     

 

FISCAL YEAR-TO-DATE

Actual

Estimate

Over/(Under)

%

Sales Tax

 $      4,802,335

 $                  4,742,500

 $           59,835

1.3%

Personal Income Tax

          5,213,779

                      5,199,300

              14,479

0.3%

Corporate Taxes

          1,427,238

                      1,263,700

            163,538

12.9%

Inheritance Tax

             521,664

                         438,800

              82,864

18.9%

Realty Transfer Tax

             216,009

                         237,100

             (21,091)

-8.9%

Other Taxes: Cigarette, Malt Beverage, Liquor, and Table Games

             742,183

                         732,300

                 9,883

1.3%

Total Tax Revenue

 $    12,923,208

 $                12,613,700

 $         309,508

2.5%

Non-Tax Revenue

             376,882

                         415,155

             (38,273)

-9.2%

Total General Fund

 $    13,300,090

 $                13,028,855

 $         271,235

2.1%

 

 

 

 

 

   


 
   

Updated: January 5, 2015

       
         

Why December matters

December is typically one of the more important months for revenue collections, as it includes sales tax on holiday shopping, income taxes on year-end bonuses (for those lucky enough to see such things), and quarterly estimated payments by corporations and wealthier individuals on income that hasn’t already had taxes withheld – such as interest, dividends and royalties.

December also marks the halfway point of the state fiscal year, making a good time to take stock of how closely actual events have matched the state budget plan. General Fund revenues, however, do not come in evenly throughout the fiscal year. State budget officials project that less than half (43%) of General Fund revenue will come in the first six months of the 2014-15 fiscal year.

Only the months of March, April, and June are normally expected to have higher revenue collections than December.

Healthy growth from last year indicates expanding economy

General Fund collections to date are higher in nearly every category than in 2013-14. Personal income tax collections are up 5.7%. While wage growth for middle-class people has been quite slow, wealthier people are seeing more of the benefit from the economic recovery, and it is showing up in income tax receipts. Sales tax collections are up nearly 5%, an indication of growing consumer confidence – finally.

A couple of results through December look better than they really are. Inheritance tax collections are up more than $100 million from the previous year, but much of that “growth” is due to a single payment from a wealthy estate in 2014. Corporate tax collections are up so far by 9% over last year, but the corporate tax cuts that went into effect on Jan. 1 are expected to result in overall corporate tax collections below 2013-14 levels by the end of the fiscal year in June. Finally, non-tax revenues have increased nearly $270 million from last year due to one-time revenue transfers from other funds; this is not indicative of future revenue growth.

2014-15 Revenue Collections Compared to Prior Year

(in $ thousands)

December

2014-15 Actual

2013-14 Actual

Over/(Under)

%

Sales Tax

 $          804,200

 $                    769,283

 $           34,917

4.5%

Personal Income Tax

          1,020,000

                       862,934

            157,066

18.2%

Corporate Taxes

             564,200

                       508,391

              55,809

11.0%

Inheritance Tax

               72,100

                          58,641

              13,459

23.0%

Realty Transfer Tax

               40,400

                          27,944

              12,456

44.6%

Other Taxes: Cigarette, Malt Beverage, Liquor, and Table Games

             146,600

                       133,038

              13,562

10.2%

Total Tax Revenue

 $      2,647,500

 $                 2,360,231

 $         287,269

12.2%

Non-Tax Revenue

               63,200

                          31,133

              32,067

103.0%

Total General Fund

 $      2,710,700

 $                 2,391,364

 $         319,336

13.4%

 

     

 

FISCAL YEAR-TO-DATE

2014-15 Actual

2013-14 Actual

Over/(Under)

%

Sales Tax

 $      4,802,335

 $                 4,577,275

            225,060

4.9%

Personal Income Tax

          5,213,779

                    4,932,323

            281,456

5.7%

Corporate Taxes

          1,427,238

                    1,309,032

            118,206

9.0%

Inheritance Tax

             521,664

                       413,157

            108,507

26.3%

Realty Transfer Tax

             216,009

                       201,344

              14,665

7.3%

Other Taxes: Cigarette, Malt Beverage, Liquor, and Table Games

             742,183

                       743,889

               (1,706)

-0.2%

Total Tax Revenue

 $    12,923,208

 $              12,177,020

 $         746,188

6.1%

Non-Tax Revenue

             376,882

                       108,555

            268,327

247.2%

Total General Fund

 $    13,300,090

 $              12,285,575

 $     1,014,515

8.3%

 

 

 

 

 

   


 
   

Updated: January 5, 2015

       
         

 

 

 

 

 

While December’s revenue results are welcome, the rest of the fiscal year could be a rougher ride than we’ve seen so far. As more revenue typically comes in during the second half of a fiscal year, a “bad” month or two of revenue collections could make the current modest revenue surplus disappear.

Finally, the better-than-expected revenue results in the first half of 2014-15 still do little to solve the massive shortfall expected in 2015-16. Over-reliance on one-time revenue sources, outdated tax structures, and year after year of corporate tax cuts are likely to come home to roost in next year’s budget, making the need for sustainable revenues more important than ever to pay for the things we care about: education, public safety, health care, and human services for our most vulnerable citizens.