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RW Topics

How Have Revenues Performed Recently?

Why do deficits and surpluses matter?

General Fund Collections Ahead

Winners & Losers

Why are Corporate Collections Up?

Other Funds of Note

Trends to Watch

Conclusions

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Introducing Revenue Watch

This marks the first edition of Revenue Watch, a periodic snapshot of the Commonwealth of Pennsylvania's revenue collections. Monitoring revenue throughout the fiscal year is important to the budget debate, as revenue performance in one year impacts the ability of the Commonwealth to fund programs and provide services in future years. The goal of Revenue Watch is to highlight the more significant trends and developments in revenue performance in an easy to understand manner.

How much does the Commonwealth collect?

The Pennsylvania General Fund budget for 2006-07, as ratified by the legislature and signed by the governor, was expected to raise $26.8 billion. This represents a $1.8 billion, or 7.0%, increase over the $25.0 billion 2005-06 enacted General Fund budget. Budgetary figures, as well as the figures in this document, are not adjusted for inflation. If budgeted amounts do not increase from year to year, the real ability to pay wages and purchase goods and services decreases.

Where does the Commonwealth's revenue come from?

General Fund revenue comes from an array of tax and non-tax sources. Taxes are the primary funding mechanism, providing almost 98% of total General Fund Revenue. Sales Tax, Personal Income Tax, and corporate taxes were estimated to make up 89% of General Fund collections in 2006-07 (for a summary of major tax rates see the Appendix).

Non-tax revenues provide the remaining 2% of revenue for the General Fund. These include profit from the Commonwealth's liquor stores, interest earned by the Pennsylvania Treasury, revenue from licenses and fees collected by different state agencies, and penalties and interest from delinquent taxpayers.

How have revenues performed in recent years?

General Fund revenues totaled $25.9 billion in 2005-06. This exceeded estimate by $864 million, or 3.5% of the original budget. In 2004-05, $24.3 billion was collected in General Fund revenue, a revenue surplus of $442 million, or 1.9%.

Why do deficits and surpluses matter?

When revenues run ahead of estimates, it means that the Commonwealth has more funds available to support health, education, transportation, libraries and other state services. If revenues fall short of estimates, the Commonwealth has to be more cautious with discretionary spending.

Pennsylvania's General Fund collections running ahead of expectations in 2007

General Fund revenue collections began the 2006-07 fiscal year slowly, running close to or behind budgeted amounts from July to January. They have picked up steam in the third quarter. If current trends continue, revenue may exceed projections by $300 million by June.

Total General Fund revenue is $250.5 million (or 1.3%) over the forecasted $19.1 billion that was estimated to be collected as of March 2007 for the fiscal year. Through March 2007, tax revenue is $263.0 million (1.4%) higher than estimate and non-tax revenue is $12.5 million (3.7%) lower than estimate.

The General Fund's revenue distribution for 2006-07 as of March is as follows:

Comparing the above graph to the "Estimated General Fund Revenue by Source, 2006-07" graph, two things can be seen. Collections of corporation taxes through March are currently a larger portion of the total than was expected for the full fiscal year. Conversely, Personal Income Tax collections currently make up a smaller share of the whole than was estimated for the full fiscal year.

Corporate collections driving surplus

Stronger than expected corporate tax collections are driving the increase. Corporate taxes are currently $263.1 million (6.8%) over estimate. This eclipses the total cumulative tax revenue surplus of $263.0, according Pennsylvania Department of Revenue data. Strong corporate profits in Pennsylvania and across the nation are responsible for the healthy increase in corporate income tax revenue.

The winners (so far)

Aside from corporate taxes, Personal Income Tax is also exceeding official estimates ($89.3 million, or 1.3%).

The losers (so far)

Sales Tax, Other Consumption Taxes, Other Taxes, and Non-Tax Revenue collections in 2006-07 are below estimate by $39.5 million (0.6%), $0.1 million, $49.8 million, and $12.5 million, respectively.

Why are corporate collections up?

The primary drivers of the corporate tax surplus are Gross Receipts Tax (GRT), Corporate Net Income Tax (CNIT), and the Capital Stock & Franchise Tax (CSFT).

Within the corporate tax category, Gross Receipts Tax collections are $97.6 million (8.2%) over estimate. Historically, less than 1% of Gross Receipts Tax collections are collected from April through the end of the fiscal year, so this surplus should remain fairly unchanged through year end.

Corporate Net Income Tax currently exceeds estimate by $67.5 million (4.4%) as corporate profits were higher than projected when the 2006-07 Budget was developed.

Capital Stock & Franchise Taxes exceed estimate by $67.8 million (11.2%). CSFT collections may exceed estimate due in large part to the mechanics of how the tax is calculated. One of the components of the tax calculation is average net income, which is calculated over a five year period. Higher than expected corporate profits in 2006 contribute to the higher collections of CSFT, but do not explain all of the variance. This is the only corporate tax that is lower than comparable 2005-06 fiscal year to date collections, due to the continued phaseout of the CSFT rate (5.99 mills for tax year 2005 to 4.89 mills in tax year 2006).

Financial Taxes (those imposed on Mutual Thrifts and Banks) exceed estimate by $21.3 million (11.6%). Insurance Premiums Tax collections exceed estimate by $3.7 million (1.0%). Other corporate taxes exceed estimate by $5.2 million.

Other funds of note

Revenue collections in the Motor License Fund are $8.0 million (0.5%) less than estimate, as of March. This variance is due primarily to Liquid Fuel Tax collections being $13.1 million (1.3%) less than estimate. Fuel taxes are levied on a fixed, per gallon basis. As market prices for fuel increase, any demand decrease will translate into lower fuel tax collections. Licenses and Fees are $10.6 million (1.8%) higher than estimate, partially offsetting the Liquid Fuels Tax deficit.

The State Gaming Fund has collected $371.2 million in the current fiscal year through March. According to information listed in the 2007-08 Governor's Executive Budget, this fund is projected to collect $443.9 million in 2006-07. Of this, $228 million is to be transferred to the Property Tax Relief Fund. Special Session Act 1 of 2006 stipulated that once the Property Tax Relief Fund's balance reaches $570 million, the Commonwealth can begin distributing property tax relief to homeowners. This is not expected to occur in calendar year 2007.

Trends to watch

Corporate Taxes. Recent CNIT and CSFT collections are significantly exceeding estimated collections. At the beginning of the fiscal year, the Department of Revenue estimated that slightly over $600 million of CNIT and CSFT would be collected in April 2007. March collections exceeded estimate by over $80 million. Is this surplus a "real" surplus or is it money that has merely been remitted ahead of schedule? April collections should be able to answer this question.

Sales Tax. Year-to-date collections of Sales Tax through March were 0.6% below estimate. Collections in March, itself, were 1.9% below estimate. Will Sales Tax collections through the remainder of the fiscal year be able to recover? Of particular note are vehicle sales which are traditionally strong in the last three months of the state's fiscal year, running July to June.

Personal Income Tax (PIT). April is normally the largest single month for non-withholding PIT payments, as tax returns for 2006 are due. According to the Department of Revenue's Monthly Revenue Report, over $1 billion of non-withholding payments were estimated at the beginning of the fiscal year to be collected in April 2007. Non-withholding payments are primarily made to cover tax due on non-wage income (income from interest, dividends, business earnings, etc.).

Non-Tax Revenue. Fifty million dollars in profits from the state liquor stores was estimated to be transferred in March, April, and May of 2007. No funds were transferred in March. Will all $150 million be transferred in 2006-07 or will it end up being a lesser amount?

Motor Fuels Taxes. Will continued high gasoline prices cause consumers to reduce fuel usage? Liquid fuel tax receipts traditionally increase in the last quarter of the fiscal year due to increased vacation travel.

Conclusions

The $250 million (1.3%) revenue surplus that has been amassed in the General Fund through March should enable the General Fund to meet or exceed budget estimates for 2006-07. Since 1998-99, the General Fund's position relative to budget expectations has worsened in the final quarter of the fiscal year only one time. Without a sudden, significant downturn in Pennsylvania's economy, it is reasonable to conclude that current trends will continue through June.

General Fund collections in April were estimated to be $3.48 billion. If actual collections meet this estimate, the General Fund should be able to generate a surplus for the third straight year. Twenty-five percent of surplus revenue is deposited into the Rainy Day Fund, under state law. The rest is available to balance the budget for the next fiscal year.

Appendix: Summary of PA Tax Rates

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