Pennsylvania General Fund revenue collections fell short of estimate, for practical purposes, by more than $100 million in what is usually the largest month of collections for the year. March receipts typically get a boost from a swell in corporate tax payments, but lower-than-expected bank tax collections this March brought corporate tax revenues in well below estimate. Sales tax collections also missed the mark for the fifth straight month.
Pennsylvania General Fund revenue collections fell short of estimate, for practical purposes, by more than $100 million in what is usually the largest month of collections for the year. March receipts typically get a boost from a swell in corporate tax payments, but lower-than-expected bank tax collections this March brought corporate tax revenues in well below estimate. Sales tax collections also missed the mark for the fifth straight month.
By the numbers, General Fund collections fell $100.7 million, or 2.4%, short of expectations in March, bringing the fiscal year-to-date shortfall to $176 million, or 0.9%.
On paper, the March shortfall is not as large due to the acceleration in the transfer of $80 million of liquor store profits (normally done in June). The Department of Revenue clearly and fairly indicates that this was done for cash-flow reasons, not to sugarcoat the shortfall. For purposes of our analysis, the $80 million early transfer is not included in the numbers.
While collections so far this fiscal year lag estimate by only 1%, there are a number of reasons to be concerned going forward:
- March is the fourth straight month that Pennsylvania missed General Fund revenue estimates. A bounce back at this point is looking more and more unlikely.
- This lackluster showing seems to confirm that the monthly growth projected for 2014 was too high, as revenues have missed targets set for each of the three months so far. If this pattern persists, March may not be the last month of shortfalls.
- Nearly half of all corporate taxes expected to be collected in the fiscal year come in during March, including almost all bank, insurance, and gross receipts taxes. For the month, corporate taxes fell $82 million, or 3.4%, short of estimate.
- Early indications are that weak bank tax payments are to blame for the corporate tax shortfall – falling $129 million, or 37%, below the March estimate. As part of the 2013-14 budget agreement, the Legislature adopted changes to the bank tax that broadened its base and lowered the tax rate. This move was thought to be relatively revenue neutral, but if these payments do not bounce back, the change could be an inadvertent tax cut for financial institutions that must be addressed. A report on the impact of this tax change is not due until December 2014.
- Sales tax collections have fallen short of estimate for the fifth straight month. There was hope after last month that sales tax collections would recover after the weather improved, but that did not happen in March. Sales tax collections are only modestly off track so far ($111 million, or 1.6%), but that may be too much of a shortfall to make up in the final quarter of the fiscal year.
- Personal income tax collections came in above estimate, preventing March’s shortfall from being even deeper. For the fiscal year, PIT revenues remain $70.6 million, or 0.9%, below estimate.
- Shortfall amps up pressure on 2014-15 budget. The Governor’s proposed 2014-15 budget assumes 2013-14 revenues come in at estimate. It seems more likely now that revenues will fall short for the fiscal year. Any shortfall in 2013-14 makes it more difficult to craft a budget for 2014-15, particularly with modest spending increases, as Governor Corbett has proposed.
- 2014-15 revenue projections may be too optimistic. The Governor’s proposal includes tax revenue growth of 3.9% in 2014-15. Tax growth this year is coming in well below what was anticipated, increasing by a mere 0.6% so far. In addition, corporate tax collections are expected to decline next year due in large part to another cut in the capital stock and franchise tax rate and an increase in the net operating loss allowance for corporate net income tax. Overall revenue growth was predicated on stronger personal income and sales tax growth; however, sluggish sales tax collections this year may make lawmakers rethink healthier growth in 2014-15.
While the revenue shortfall remains manageable, troubling signs continue to build as the 2014-15 budget is negotiated. At this point, budget negotiations will likely wait until after collections for April, the second most important month in revenue terms, are tallied. For more details on the revenue numbers, click here.