States Get Off Revenue Roller Coaster

Things are looking a little brighter these days for the unsung folks in state government who estimate how much money their treasuries will have in the coming year. After two years of wild swings in tax collections because of the worst recession in 70 years, state revenue has stabilized enough that officials have a better chance to predict the amount of money governors and legislatures will be able to work with as they put together state budgets. And the outlook isn’t just for greater stability; it’s for significant increases in the amount of revenue coming in.

A study out today documents the extent to which state revenue estimates were off target during 2009, the worst year of the recession. Revenue forecasts were incorrect by 10.2 percent that year, according to the study by the Pew Center on the States ( Stateline ‘s parent organization) and the Rockefeller Institute of Government. Put another way, the median 10 percent error means states had an unexpected combined shortfall of $50 billion added to the budget gaps they already were closing through spending cuts and tax increases and by raiding rainy day funds.

Collections from personal and corporate income and sales taxes still are hard to predict in a shifting economy. Governor Mitch Daniels of Indiana, one of the states where revenue forecasts have improved, warns of the continuing volatility of the economy. “There’s a huge uncertainty here,” he said at a meeting of governors in Washington over the weekend.

Daniels has been conservative about revenue estimates: At one point he asked state forecasters to revise the revenue estimating formula to reflect the drop in sales taxes. At Sunday’s meeting of governors, he said the depressed housing market and the possibility of -a-gallon gasoline threaten the improvement in revenues.

Cautious approach

But most state officials say the slowly improving economy has led to more accurate and more favorable estimates of tax revenue. Kentucky is on pace in the current fiscal year to meet its revenue estimates for the first time since 2007, says state budget director Mary Lassiter.  Pennsylvania’s general fund tax collections from July through January were 2 percent above the initial forecasts, says revenue secretary Daniel Meuser. North Carolina Governor Bev Perdue lowered the state’s projected fiscal 2012 budget shortfall after revenue forecasters predicted February 9 that North Carolina would bring in an estimated $600 million in additional tax revenue next fiscal year above what forecasters predicted last April.

“Given the uncertainty surrounding the pace of growth in the economy, the…forecasters took a cautious approach,” says Barry Boardman, a North Carolina state economist.

Two years ago at this time, nearly every state forecast offered revenue estimates that proved inaccurate weeks after they were issued. The Pew-Rockefeller report, citing the volatility of state taxes, concluded that the size of the estimating errors grew progressively worse during the last three economic downturns: 1990-92, 2001-03 and 2007-09.

Indiana’s revenue forecasts were off by less than 1 percent over the 23-year period of the study, an admirable rate considering the median error among the 50 states was 3.5 percent. But during the recession, Indiana forecasters were typical of those in other states, missing their revenue estimates by a substantial amount for 17 straight months. Those days seem to be over; through the first seven months of the current fiscal year, tax collections are 1.1 percent above the most recently updated revenue forecast.

Driving the Indiana increase was a record January for sales tax collections, a trend also seen in other states after the 2010 Christmas shopping season. A sharp decline in sales tax collections, normally a stable, predictable revenue source, was a big cause of the volatile estimates in 2009, according to the Pew-Rockefeller report. Preliminary figures collected from 41 states by the Rockefeller Institute for the last three months of 2010 period showed sales tax collections up about 6 percent over the same three months in 2009.

Income tax improvements

The other two taxes studied by Pew and Rockefeller — personal and corporate income — also rose in the third quarter of last year in many states. By contrast, the declines in personal and corporate income and sales tax revenue were especially sharp in the first three quarters of 2009, compounding the estimators’ difficulty in forecasting how much money states would have available to spend.

Despite improved forecasts, no one is really celebrating, because tax collections still have not caught up to pre-recession levels in many states. That is why many states still are closing budget gaps through spending cuts, tax increases and borrowing. Tennessee is typical. Largely because of a year-over-year increase in sales tax receipts, the state has collected $115 million more in overall tax revenue through December than was first estimated in April, says finance commissioner Mark Emkes.

Tennessee Governor Bill Haslam said in an interview at the weekend governors meeting that he is still playing it cautiously, ordering state agencies to prepare a list of cuts up to 2 percent in the budget that takes effect July 1. He said previous estimates in the growth of revenue before he took office in January were too optimistic and assumed the depletion of about $185 million in rainy day funds. “We’re working hard to not draw those down,” Haslam says.

Missouri’s tax collections have improved dramatically compared with a year ago, rising 6.3 percent and exceeding forecasts. That allowed Governor Jay Nixon to restore school bus transportation subsidies to local school districts that suffered cuts last year. Nevertheless, with the end of federal stimulus money, the state will still have a sizable budget gap to close in the fiscal year that begins July 1. Nixon said in an interview at the governors meeting that pinning down estimates is a constant challenge. “In a state where 85 percent of our revenue comes from sales and income taxes, it’s going to vacillate with the economy,” he said.

Jeffrey Carr, one of Vermont’s revenue estimators, says that forecasting turning points in economic cycles “is always trickier.”  But he says the fact that Vermont is on a recovery track and that there have only been minor technical corrections in the last two forecasts “implies a sense of greater stability to the flow of revenue receipts. That is always a welcome development for those of us doing forecasts.”