Budget Briefing: In Dueling Revenue Estimates, the Difference of Just One Percent Could Threaten Surplus
Today NJPP begins a series of in-depth examinations of major issues in the recently enacted FY 2014 budget. Tomorrow, we’ll take a closer look at the fate of the Earned Income Tax Credit.
No surprise that the Office of Legislative Services (OLS) and the Christie administration came up with slightly different numbers about tax collections over two years. Between FY 2013, which ended June 30, and FY 2014, the administration expects to collect $64.008 billion; OLS thinks revenues in both years will yield $700 million less. Is such a small difference material? It could be.
Last year, OLS projected a shortfall of $628 million and the administration ended up having to move hundreds of millions in spending around to produce a balanced budget. The same thing could happen again.
Here’s why it matters: The projected surplus for FY 2014 is only $300 million, less than one percent. That’s not much of a cushion in the eyes of the credit rating agencies – or anyone else.
Each May, with ten months of tax collections in hand, the administration and OLS present their year-end projections to the budget committees. Most years, the two projections are very close. Not so in May 2013: The administration assumed $31.195 billion in revenue; $259 million more than the $30.936 billion assumed by OLS. This nearly 1 percent difference is one of the largest ever so late in the fiscal year.
Since the adoption of the budget, the administration and OLS have updated their estimates based on May’s collections and a snapshot of the major taxes. OLS has reduced its projected shortfalls the corporate and sales taxes so that the two estimates are narrowing. OLS still expects a shortfall in FY 2013 but one lower than its $259 million May projection.
With so many moving parts the final numbers for FY 2013 will not be known until an audit is released in December or January. Only then will we know if the $467 million surplus assumed in this year’s budget will be realized or not. However, an accurate projection will be possible in September when the year-end revenues are confirmed by the administration. If the FY 2013 collections are closer to the administration numbers, then the current growth rates assumed by both the administration and OLS will be sufficient to meet the projections (excluding internet gaming).
All of this back and forth has a significant impact on the recently enacted budget. Its $32.813 billion in revenue is $441 million above the late May OLS projection of $32.379 billion. The difference for FY 2014 is due primarily to the differences in FY 2013 projections. Except for the $130 million disagreement about internet gambling revenues, OLS and the administration are very close together on their views of the economy and the rate of revenue increase.
A true reading of FY 2014 revenue will likely not be available until early January 2014 when important income tax and sales tax collections are known. A wild card for FY 2014 could be the income tax where both the administration and OLS interpreted the spike in income tax payments toward the end of calendar 2012 to taxpayers avoiding higher federal rates on capital gains beginning in 2013. If both underestimated the amount of one-time revenue then they may be overestimating FY 2014 income tax revenue.
“Past performance is no guarantee of future results” warn the mutual fund ads. So too with the records of OLS and successive administrations. But in 2013, OLS was more accurate in its projections. Last year the difference between OLS and the administration was $628 million ($154 million for FY 2012 and $474 million for FY 2013). For FY 2012, audited revenue was $317 million below the administration’s final target, offset partially by spending coming in $194 million lower, thereby cutting the opening surplus for FY 2013 by $123 million. In FY 2013, the administration has reduced its estimates by $538 million, which is actually more than the $474 million potential shortfall estimated by OLS last June.
A side note on the competing projections: For the past two years, Democratic leaders have insisted that they must use the governor’s projections, rather than the lower estimates provided by OLS, since the governor has sole power to certify the revenue in the budget. But this is not the case: the legislature has chosen to use the higher estimates to avoid the politically distasteful task of filling in the hole with higher revenue, reduced spending or some combination. This explains why the Democratic majority chose in 2011 to use the OLS estimates for FY 2012 that were higher than those of the administration. This allowed legislators to fund their favored priorities with the higher revenue rather than making painful cuts.
David Rosen, the OLS budget expert, reminded the budget committee this spring that the governor’s certification was a ceiling, not a floor. In other words, the legislature could use lower estimates and pass them along to the governor, who could either certify them or stick with the higher projection. However, the governor’s power is restricted to increasing the budgeted revenues, not the spending. The single result of a higher ceiling would be to increase the budgeted surplus.