April Revenues and Corporate Taxes Plummet Below 2012-13 Levels

Something emerged from April’s revenue results[1] that is troubling and has a longer lasting impact on the Commonwealth’s ability to make critical investments in education, health care, and infrastructure than merely missing revenue targets. Revenue collections are now $87 million, or 0.4%, less than they were at this point in 2012-13 – and this shortfall is largely our own doing. While personal income and sales taxes have grown by $242 million, or 1.4% collectively, from last year (as could be expected in a slowly growing economy), corporate tax collections have dropped by $292 million compared to last year.

The reduction in corporate tax collections from last year is not due to flagging profits or economic conditions, but can be traced back to tax cuts enacted in recent years. The capital stock and franchise tax rate was cut in 2012, 2013, and 2014, and collections have fallen by $211 million, representing a tax loss of 44% from this point last year. Bank taxes were reformed in the 2013-14 budget agreement, broadening the base and lowering the tax rate in what was thought to be a “revenue neutral” change. The result, so far, has been a decrease in bank taxes of $65 million, or 19% from a year ago. A change in the bank tax law may be necessary to correct this in future years.

These are permanent revenue losses that will continue to drag overall state tax revenue growth, making it more difficult to pay for state services going forward.

April showers on already soft 2013-14 revenues

The downward spiral of Pennsylvania General Fund revenues continued in April, falling $328 million short of estimate for the month, a shortfall of 9%. For the fiscal year, revenues are now $506 million, or 2.1% below estimate. This is the fifth straight month where revenues fell short of estimate.

With only three months left in the fiscal year and only one of them being a “major” revenue collections month, it is now highly likely the state will fall far short of revenue targets for the fiscal year. The results from both March and April make crafting a spending plan for 2014-15 over the next few months more difficult as revenue collection expectations for next year will be lower. Without additional revenue, planned increases for schools, early education, and critical human services are at risk.

Shortfall in income tax payments in April 2014 thought to be a one-time correction

April collections fell short of revenue targets primarily in two area – settlement of 2013 personal income tax bills and corporate taxes. “Non-withheld” PIT payments were $190 million lower than estimate in what is the largest month for such payments. These payments were higher in 2012 for high-income individuals, as many chose to pay taxes on investment income in 2012 to avoid a 2013 federal tax increase. The results in April seem to indicate that more income than expected was moved into 2012 from 2013, causing 2012-related payments to swell (in April 2013) and 2013 income to fall. Returns for 2014, to be filed in April 2015 should be more “normal.”

This was not unexpected. In April 2013, and again in September, the influential Rockefeller Institute of Government warned that state income tax receipts across the country for 2012 (largely paid in 2012-13) were temporarily inflated. They noted:

“The “bubble” in income tax receipts most definitely would be short-lived, and in fact should lead to slower growth later in year. Therefore, state officials should be cautious about using any unanticipated revenue for ongoing spending increases or revenue reductions.”^[2]

Pennsylvania, like some (but not all) other states, underestimated this impact, forecasting a 2% decline in the non-withheld April 2014 PIT payments from the year before. The actual figure turned out to be a 17% decline, year over year.

The other area of shortfall from estimate in April was corporate taxes. Both corporate net income and capital stock and franchise tax receipts were lower than expected, by a combined $95 million. For the fiscal year, corporate net income tax collections are now $25 million, or 0.4%, higher than estimate and the capital stock and franchise tax falls to $3 million, or 0.1% below estimates for the fiscal year.

Two moderately bright notes in an otherwise gloomy April revenue report were that sales tax collections pulled out of their five-month slide and exceeded its April target by $4 million (still down $106 million for the fiscal year) and personal income tax collections from paychecks also exceeded its monthly estimate by $4 million.

Even if revenue collections moderate in the final quarter of 2013-14, expect a revenue deficit of a half a billion dollars or more and a decline in revenues expected in 2014-15. This means without additional revenue in the 2014-15 budget, dramatic cuts from the governor’s February budget proposal are likely.