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For the sixth straight month, General Fund revenues fell short of estimate in May, missing the target by $108 million, or 5.5% for the month. The year-to-date revenue deficit grows to $613 million, or 2.3% below estimate (excluding the early transfer of liquor store profits in March). The deficit is now larger than the $581 million the Independent Fiscal Office had forecasted for the fiscal year just one month ago, as tax collections in nearly every category fell short of estimate in May.
Unfortunately, things did not have to be this way.
Looking at revenue growth from the prior fiscal year, it is apparent that this funding crisis is largely self-inflicted. Tax revenue has dropped $173 million from this point in 2012-13. While sales tax shows modest growth and personal income taxes are flat (due in large part to wealthy taxpayers recognizing capital gains on their 2012 returns to avoid a federal tax hike), corporate taxes have fallen $322 million, or 6.9% from last year. Some of the largest portions of this loss of revenue come from the capital stock and franchise tax (down $255 million) and bank taxes (still down $35 million after some late payments in May), both of which had tax rate cuts as part of the 2013-14 budget.
The anemic revenue collections in May push the funding shortfall for the 2014-15 budget to over $1.5 billion. Without new and sustainable revenue, the cuts that would be required to balance the budget could be catastrophic – at a time when the overall economy continues to grow. All gains proposed by Governor Corbett for early childhood programs, education, and other human services would likely be reversed and many non-mandated services could be slashed.
At a time when other states are starting to see healthier revenue gains, Pennsylvania is falling behind[1] – making it more difficult to restore previous cuts to education, health care, and critical human services. With less than a month left to enact a new spending plan for 2014-15, it is clear that Pennsylvania must take a balanced approach and consider new revenues to bridge the $1.5 billion funding gap.
[1] Pennsylvania’s tax revenue growth ranked 30th highest out of 46 states reporting revenues in the 1st quarter of 2014 according to data compiled by the Rockefeller Institute, http://www.rockinst.org/pdf/government_finance/state_revenue_report/2014-05-06_Data_Alert.pdf.
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