The Administration Finally Lowers its Revenue Projections, but It May Not Be Enough to Avoid an Additional Shortfall
This week the administration finally conceded the point independent analysts had been making for months: this year’s budget was built on overly optimistic growth projections, and there won’t be enough revenue to hit the targets. However, even after lowering the projections, they still may be too optimistic.
When the budget was approved in June, the governor certified major tax revenues that would need to grow by 8.3 percent. The administration’s revised estimates – $273 million lower – now project that major tax revenue will grow by 7.2 percent for the year. (The administration lowered its overall revenue projection by $406 million.)
The problem is that major tax revenue has so far this year only grown by about 2.8 percent, meaning it would need to grow by 9.5 percent over the final five months of the budget year.
Even if January’s stronger than usual growth in revenue – 7.7 percent – were to continue the rest of the year, it won’t be enough to hit the new, lower projections.
The administration increased its projection for income tax collections by $405 million, presumably based on strong December and January collections. It remains to be seen, however, whether the recent uptick is sustained, or a product of higher estimated payments by taxpayers who chose to liquidate capital gains in calendar year 2012 to take advantage of the lower federal tax rates.
This change assumes a growth rate of 9.6 percent overall for the year, up from a 5.7 percent growth rate in the initial budget. This revenue has grown by 6.6 percent so far, so it will have to grow by 9.8 percent in the next five months to hit the projection.
The administration decreased its projection for sales tax collections by $206 million. This change assumes a growth rate of 3.4 percent for the year, down from a 6.1 percent growth rate in the initial budget. This revenue has grown by 1.5 percent so far, so it will have to grow by 6 percent in the next five months to hit the projection.
The administration decreased its projection for corporate tax collections by $334 million. This change assumes a growth rate of 9.8 percent for the year, down from a 26.2 percent growth rate in the initial budget. This revenue is actually down by 4.3 percent so far, so it will have to grow by 25 percent in the next five months to hit the projection.
The revised projections are still quite aggressive, and raise concerns that a shortfall in this year’s budget will persist. For every 1 percentage point actual revenues fall below the 9.5 percent growth needed for the rest of the year, the shortfall would be between $120 million and $130 million. A growth rate of 6.5 percent (rather than the projected 9.5 percent) for the remainder of the year would eliminate the entire $375 million surplus that is now assumed in the budget.
If there’s a shortfall this year, it would likely reduce the projections for next year as well – or at least it should. It is common sense to reduce the next year’s base projections and even reduce the growth rate to more accurately reflect current conditions and the amount of money that’s actually available. Last year, even though the administration acknowledged a shortfall, it did not adjust either the revenue base or the growth assumptions for this year’s budget, thereby contributing to the now-acknowledged shortfall in the FY 2013 budget.
Other Projections Could Be in Jeopardy
The administration currently projects that $166 million in housing funds held by municipalities will be taken from those municipalities and placed into the state’s general fund. This amount is less than the $200 million contained in the adopted budget and more accurately reflects the amount actually remaining in local accounts. The administration’s attempt to take this money is currently being decided by the courts, and could end up being less – or none at all.
The budget also continues to assume a $120 million payment from the vendor that will take over the marketing and administrative functions of the state lottery. However, there is no contract yet. If the contract isn’t inked (and the actual payment received) before June 30, this will add to the shortfall.
Options Become More Limited Over Time
As we move later into the fiscal year, the administration’s options for dealing with additional shortfalls become limited. It is already projecting nearly $400 million in under spending in the current year and nearly $400 million in savings from delaying the homestead property tax credit from May to August.
One option will be to drop the surplus from $375 million to some lower amount. Other than that, the administration would need to either find additional savings or redirect balances in dedicated funds, as it did last June.
All to-date growth numbers for overall major revenue and income tax collections in this analysis are adjusted for the extra withholding payment received in January; this extra payment only means that one less payment will be received in February.
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