General Fund Revenue Outlook: Issues and Prospects

It may be too late to see much improvement for the current year.

Through March, the General Fund revenues are running $647.2 million behind schedule, or 6.5% of the $9.9 billion target. Since September 11, the shortfall for the seventh month period has been 8.2%.

The “final” revenue update is normally available about three weeks from today, after the tabulation of “tax due” payments by individuals and first-quarter estimated tax payments by high-income individuals and corporations. To date, the national economic recovery that began in Nov. has not had a significant impact on withholding or sales tax receipts, which were down 1.9% for the first quarter of 2002.

The 19% decline in fourth quarter estimated tax payments for the 2001 tax year could lead to a $314 million shortfall for the combination of “tax due” payments in April and the first two estimated tax payments for the 2002 tax year. This adjustment alone would bring the total shortfall for the year to about $950 million. In addition, there is a continued erosion of economy-based withholding, sales and corporate tax collections for the remaining months. Finally, the impact of the recession and Sept. 11 on the economic base and equity prices means that some of the 2001 tax increases will not produce the projected yield.

The General Fund revenue shortfall will most likely be close to the top end of the $.9-1.2 billion range that the Governor has been using since January. This recurring revenue shortfall becomes part of the 2002-03 budget gap due to the flow-through to the 2002-03 revenue base.

Cautious Outlook Required for 2002-03 Fiscal Year

When adopting the budget for the first year of a biennium, a tentative second-year revenue estimate is adopted. The understanding is that a full-scale revision will take place the next year. The revenue projection growth projection of 4.9% needs to be adjusted downward because:

1. The impact of lower inflation in taxable sales and wages
   
   
2. Now the experts are projecting a 67%drop in capital gains realizations from stock and bonds sales between the 2000 tax year and 2002.
   
   
3. Due to high consumer debt and lack of pent up demand, a sluggish economic recovery is expected. It normally takes 3-12 months after a recession for employers to begin rehiring.
   
   
4. The volatile situation in the Middle East could result in higher energy prices here.
   
   
5. The Federal Reserve could prematurely raise interest rates.
   
   
6. The state’s budget reserves are very limited.
   
   
7. The phased-in impact of mergers and acquisitions in banking and health care could hinder employment growth.

For these reasons, Fiscal Research has adopted a 1.8% revenue growth assumption for 2002-03. This forecast would increase the budget gap for 2002-03 by over $425 million.

Mike Easely and Richard Moore are suggesting the use of a zero growth assumption for 2002-03 revenues. This could have a $280 million impact.

Even if the economic recovery is stronger than anticipated, that strength will not be clear until well after the May 2002 forecast.

Time is running out for an improving revenue outlook.