While the revenue reports released Friday reflect only two months of tax collections, the fact that the state is already missing the mark should raise concerns – particularly since any deviation in collections can threaten this year’s very slim budgeted surplus of $300 million.
The administration acknowledges that collections through August are 1.2 percent below the budgeted targets. If this trend continues through the entire year, revenues would be off by $345 million – more than the surplus.
Meanwhile, the Office of Legislative Services (OLS) notes that the year-to-date growth rate is 4 percent – well below the projected rate of 6.6 percent. Again, if this trend continues through the entire year, revenue collections would be substantially less than projected. For every 1 percent shortfall below the projected rate, collections would be off approximately $270 million – in other words, a difference of just 1 percent could eliminate nearly the entire surplus. Tax collections are complex, however, so simply projecting this two-month growth rate to the entire year may not be accurate – but it is worth keeping an eye on.
By examining the June, July and August administration reports, we find that last year’s revenue from major taxes could be about $75 million less than expected. If this number sticks when the annual audit – which also includes the final numbers for other revenue sources and spending is released – is released this winter, this year’s $300 million surplus would be reduced by 25 percent and the already thin fiscal ice would get much thinner.
Beyond the performance of the major tax sources other revenue questions could prove important: How much will internet gambling generate, for example? The final budget says $160 million but OLS counters that that’s off by $130 million. And how much will the state actually book by diverting municipal housing funds? Last year’s budget included $165 million from this source, but that increasingly looks like an unreachable target. Finally, the administration and OLS agree that approximately $250 million of income tax collected last year was due to taxpayers paying up before the federal tax rates on capital gains increased on January 1, 2013 – a windfall not available this year. Since income tax revenues continued to exceed the projections of both the administration and OLS through the spring it is possible that even more than $250 million could be due to beat-the-increase payments.
The bottom line: With a surplus of only $300 million, even slight variations in any revenue collections may require adjustments during the year to maintain a balanced budget. And as we noted earlier this year, the easy options to patch shortfalls are disappearing – making any efforts to adjust the budget more difficult.
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