Uh-Oh: Sluggish revenue collections signal real concerns

There was very little good news in last week’s state revenue announcement as collections fell below both the prior year and this year’s estimates for both the month and the completed first quarter of FY 2014. This sluggish performance could mean a revenue shortfall this fiscal year and serious challenges for the state’s budget outlook going forward.

In September, General Revenue (GR) collections were $505.8 million, which was 6.6 percent below September 2012 and 9.8 percent below the certified estimate. For the first quarter of FY 2014, collections are running 4.1 percent below last year and 8.3 percent behind the certified estimate.  Each of the major taxes that contributes to the General Revenue fund is running below last year and below projections for the quarter:

• Individual income taxes are 8.8 percent below last year and 5.6 percent below the estimate;
• Corporate income taxes are 30.1 percent below last year and 29.3 percent below the estimate;
• Sales taxes are 4.9 percent below last year and 3.7 percent below the estimate;
• Gross production taxes are 29.9 percent below last year and 33.4 percent below the estimate;
• Motor vehicle taxes are 21.4 percent below last year and 13.6 percent below the estimate;
• Other revenue sources are 11.4 percent below last year and 9.5 percent below the estimate.

As can be seen from the graph below, after two years of post-recession growth, Oklahoma’s general revenue collections have stalled at well below pre-recession levels. GR for the first quarter of FY 2014  is not only down 19.4 percent from its peak in FY 2009, but is less than it was eight years ago. A growing shift of income tax revenues to the ROADS fund and to Oklahoma Promise scholarships accounts for some of the decrease. This year’s numbers also include the first installment of a $60 million allocation of income tax revenues for Capitol repairs.

Even though these other factors may be affecting the revenue report as much as the economy, other recent indicators provide a warning that the Oklahoma economy may have softened.  The latest State Economic Monitor from the Tax Policy Center reports that Oklahoma is one of just six states – along with Alaska, Idaho, Michigan, Rhode Island, and West Virginia – that saw a drop this past quarter in key economic conditions identified by the Federal Reserve Bank of Philadelphia as “state coincident indices.” Combining nonfarm unemployment, average manufacturing hours worked, unemployment rate, and real wages, Oklahoma’s coincident indices in August were down 0.2 percent for the past three months, while the indices for the nation as a whole rose 0.7 percent. Looking ahead to expected future economic activity, Oklahoma’s leading indices for the next six months are at 0.39, well below the national average of 1.37 and eighth lowest in the nation.  This data was compiled prior to the federal government shutdown, which is likely to further dampen the economic outlook.

This year’s state budget is based on projections that were certified by the Board of Equalization earlier this year. At the time, GR for last year was projected to be $5.684 billion and to grow by $205 million in FY 2014. However, last year’s GR came in $106 million below projections. As a result, GR needs to grow by $311 million, or 5.6 percent, to reach this year’s projections.  Instead, collections through the first three months are running $54 million behind last year.

Because the legislature can only appropriate 95 percent of the GR estimate, there is some cushion built into the budget when revenues fail to meet projections. However, should the shortfall, currently at 8.5 percent, not dwindle in the next few months, the State Finance Director must declare a “revenue shortfall.” That would lead to automatic across-the-board budget cuts, unless the legislature opted to make up the shortfall by appropriating from the Rainy Day Fund.

The stagnant or declining revenue collections also serve as an early alarm bell for next year’s budget. This past year, based on optimistic revenue projections, state appropriations increased by $287 million, or 4.1 percent. We will not have an initial estimate for FY 2015 until mid-December, but it seems unlikely that there will be much, if any, revenue growth available for next year’s budget.  We already know that the state must absorb $50 million in additional Medicaid costs due to a reduced federal matching rate, continue to increase transportation funding under the ROADS plan, meet its commitment to the child welfare lawsuit settlement, and deal with the crisis in corrections staffing, without even addressing the need to restore education funding and address other priorities. Yet unless the court strikes it down or the legislature acts to defer or repeal it, another cut in the top income tax rate is scheduled to take effect in 2015. The bill is projected to cost $54 million in FY 2015 and up to $176 million in FY 2016, if a further rate cut takes effect.