State revenue continues to grow

Summary: The inflationary pressures of 2022 have benefited the Commonwealth of Pennsylvania’s general fund revenues.  Through October, all the major components of the general fund—the corporate net income tax, personal income tax and the sales and use tax—are trending higher than they were in calendar year 2021.  However, a recent business survey indicates that the outlook for the next six months is not positive among executives as continued inflation will remain a challenge for the business community. 

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General fund revenues

Through October, total general fund revenues have reached $38.48 billion, roughly $5 billion ahead of calendar year 2021 when the amount through October came in at $33.95 billion.  At this current pace, calendar year 2022 is projected to hit $46.17 billion, which would be nearly 4 percent higher than last year.

Calendar year 2021’s $44.4 billion in total general fund revenue stands as the current high-water mark, aided in large part by the federal government’s stimulus payments in the wake of the pandemic.  The previous high was $35.6 billion in 2018.  The projected 2022 amount of $46.17 billion, aided by an inflationary economy, will be nearly 30 percent higher than 2018.  Over the 10 years before the pandemic, the range went from $26.7 billion (2010) to $35.2 billion (2019)—a growth rate of just 32 percent. Over the last three years, 2019 to projected 2022, the growth rate will be 31.1 percent.

While the inflationary economy has boosted revenues, it has also boosted costs as the prices of goods and services the state uses have also been affected. 

General fund revenue components

The largest component is the personal income tax which represented 35.5 percent ($15.76 billion) of total general fund revenues in calendar year 2021.  Once again, 2021’s collection was the high-water mark coming in 12 percent ahead of pandemic-affected 2020.  However, through October 2022, personal income tax collections sit at $16.3 billion and are likely to reach $18.5 billion by the end of the calendar year—13.5 percent greater than last calendar year. 

In 2010, the amount of personal income tax collected was $10.1 billion and steadily grew until reaching $14.4 billion in 2019—growth of 42.2 percent over the 10-year period.  In just three years, from 2019 to projected 2022, the growth rate is on pace to be 28.5 percent.  This jump has likely been fueled by inflationary pressures that have pushed up wages. 

Sales and use taxes are the second largest source of revenues for the general fund representing 30 percent of that total in 2021.  The $13.4 billion collected in calendar 2021 was also the highest level achieved.  Through October 2022 the amount collected is $11.9 billion—89 percent of 2021’s total.  With two months remaining, it will be on pace to reach $14.3 billion, about 6.4 percent greater than last year.  As the sales and use tax is a percentage of a product’s price, this growth is also largely due to the inflationary pressure in the economy.

From 2010 until 2019, the growth rate of the sales and use tax was 37 percent.  In the three years since 2019, that growth rate is 27 percent.  Due in part to stimulus payments in 2020, the sales and use tax increased over the 2019 level, one of the few general fund revenue streams to do so. 

The final component is the corporate net income tax.  This revenue stream brought in $4.45 billion through the first ten months of 2022 and is on pace to reach $5.34 billion.  For calendar 2021, the state garnered $4.65 billion.  The projected 2022 amount would be an increase of 14.6 percent over last year.  Again, this is more a result of inflation increasing prices, or being blamed for price increases, that were passed onto consumers in the 2022 economy.

In calendar 2010, the corporate net income tax came in at $1.9 billion and had risen 79 percent over 10 years to reach $3.4 billion in 2019.  At the projected amount of $5.34 billion, it would have increased another 20 percent in three years since 2019. 

It is also worth noting that the state will begin reducing the rate on this tax from the current 9.99 percent to 8.99 percent in 2023 to 4.99 percent by 2031 (Policy Brief, Vol. 22, No. 31).  It will be worth keeping track of how the business community reacts to this decrease and what the effect will be on state general fund revenues going forward.

Business climate survey

The Lincoln Institute of Public Opinion conducts a business climate survey every spring and fall, asking questions of business decision-makers. From the fall 2022 survey, the first question focused on the current state of the economy when the respondents were asked what their business’ top challenge is.  They were allowed to select more than one answer.  The top vote-getter was inflation/rising costs, followed by current economic conditions and concern over future economic conditions. 

When asked what steps that decision-maker would take in the next six months to deal with the inflationary economy, the top answer, again checking all that applied, was to increase their prices followed by increasing wages and or benefits for their employees.  And, of course, this will continue to boost the general fund revenues mentioned above.  The higher prices result in higher sales and use tax revenue and higher wages result in greater personal income tax collections. So, it is very likely the trend of rising general fund revenues will continue throughout calendar 2023.

Another question focused on employment by asking the respondents if their business had difficulty in finding enough qualified employees to fill open positions.  The top two answers, garnering a total of 64.3 percent of the responses, were yes, with some difficulty (34.3 percent) and yes, with significant difficulty (30 percent). The same question was asked in the spring survey and the results were a bit higher with 65.5 percent claiming to have either some or significant difficulty finding enough qualified employees to fill open positions. 

The implication of this question is that those people who are qualified are commanding higher wages and benefits in the job market as firms compete for their services, which, in turn, increases the amount of personal income taxes that they will pay to state coffers.  

When asked about employment levels at their workplace, 51 percent of respondents claimed that their employment levels in the fall are the same as they were six months ago and about an equal percentage (51.7) also believe that they will remain the same six months from now.  It is very likely this tight market for qualified employees will continue. 

Respondents were also asked if Pennsylvania’s fall business climate was better than it was in the spring.  Only 20 percent of respondents claimed that they were, while 35 percent believed it to have gotten worse.

Looking ahead six months, only 23 percent believed that Pennsylvania’s business climate will improve while 35 percent believe that it will get worse. 

Conclusion

The national inflationary economy has benefitted the commonwealth’s general fund tax coffers as prices for both goods and wages have been pushed up by levels not seen in decades.  However, the danger is in thinking this economic situation will continue.  Policymakers must resist the temptation to engage in spending sprees that cannot be sustained when the inevitable downturn happens.  It is also worth remembering that the prices of goods and services used and purchased by commonwealth agencies have also gone up, so the increase in general fund revenues may not be the boon policymakers think it is.  The jump in revenue may be needed to sustain real spending levels.

Pennsylvania must take action to make the state a more business-friendly location for not only new firms but existing firms as well.  Embarking on reducing one of the nation’s highest corporate net income tax rates is a good start. 

But action needs to be taken with the labor climate.  As we have written time and again, Pennsylvania cannot compete with Right-to-Work states in terms of economic growth.  Eliminating the right of transit workers and public-school teachers to strike is another goal that should be achieved along with abolishing the prevailing wage law. 

These are steps that would go a long way in reducing the cost of government, reduce the reliance on such high tax collections and make Pennsylvania more economically competitive nationally.

Pennsylvania revenues surge in the current fiscal year

Summary: When Gov. Wolf released his budget for the upcoming fiscal year (2022-23), it was filled with a wish list of spending increases in many areas, especially education.  He noted that for the current fiscal year (2021-22), the commonwealth will end with a $3 billion budget surplus and during his tenure, the rainy-day fund has gone from $231,000 to $2.865 billion.  His total general fund budget proposal comes in at $43.71 billion, up from this fiscal year’s general fund budget of $38.54 billion (13.4 percent). 

This proposed spending spree is being fueled in large part by an increase to general fund revenues. 

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When the 2020 pandemic struck, the prevailing wisdom was that general fund revenues would take an enormous hit.  This was true for the lockdown months—mid-March through June—as much of the economy faltered.  But since then, the revenues coming into Pennsylvania’s general fund have been quite robust, thanks in part to the federal government pouring stimulus money into the national and state economies.

Total general fund revenues

Pennsylvania’s fiscal year runs from July 1 of one year through June 30 of the next.  The beginning of the pandemic coincided with the final months of fiscal year 2019-20.  That year, total general fund revenues came in at $32.28 billion, 7.4 percent lower than the previous fiscal year.  This was in large part due to the lockdown months of mid-March, April, May and June.  All four months had collections below the same month a year earlier. April revenue was especially hard hit—down 50 percent—in large part due to the personal income tax deadline being moved to July. 

But thanks to the shifting that deadline, July 2020’s collections were 76 percent higher than July 2019.  For fiscal 2020-21, total general fund collections were $40.39 billion, or 25 percent higher than fiscal 2019-20, largely owing to the personal tax deadline postponement.   

Thus far in the current fiscal year, 2021-22, general fund revenues are once again outpacing the collections from a year earlier.  Revenue data are available only from July 2021 through January 2022.  During these first seven months of the current fiscal year, the $26.15 billion in revenue raised is 23.4 percent ahead of the $21.18 billion for the first seven months last fiscal year. And it is by far the highest total of the last decade.

A contributing factor is money from the American Rescue Plan Act, which gave the commonwealth $3.84 billion in November through the State and Local Fiscal Recovery Funds (14.7 percent of the first seven months revenue).  One of the purposes of this money is to replace lost public-sector revenue.  The only prohibitions are that the money cannot be spent on debt service, or to replenish rainy day funds or to pay off any settlements or judgements.  Under the act, the money must be used for costs incurred on or after March 3, 2021, be obligated by Dec. 31, 2024, and spent by Dec. 31, 2026. 

Note that even without the rescue plan money, the commonwealth was still ahead of previous years.  The $22.31 billion collected, excluding the plan money, is still 5 percent higher than the $21.8 billion raised in same months during the last fiscal year—July 2020 through January 2021. 

The three main categories of the general fund are the personal net income tax, the sales and use tax and the corporate net income tax.  The driver of the increase this year is the sales and use tax.

Sales and use tax revenues

For fiscal 2020-21, the $12.83 billion in sales and use tax revenues collected were 18.7 percent higher than the previous fiscal year.  Fiscal 2019-20’s collections, which included the lockdown months of mid-March through June, finished with $10.8 billion which was, in light of the large employment reductions, surprisingly only 2.5 percent lower than fiscal 2018-19.  During the previous five fiscal years, fiscal 2012-13 through 2017-18, sales and use tax revenue growth ranged from 2.14 percent to 3.98 percent. 

For the first seven months of fiscal 2021-22, the sales and use tax collections have been very strong, coming in at $8.31 billion, 11.4 percent higher than during the first seven months of fiscal 2020-21.  With a monthly average of $1.2 billion, it is on pace to exceed $14.2 billion—11 percent higher than last fiscal year. 

While sales and use tax collections have been quite strong over the last few years, this year’s collections are likely being fueled by high inflation.  According to the Bureau of Labor Statistics, over the 12 months from January 2021 to January 2022, the Consumer Price Index rose 7.5 percent.  Since sales and use taxes are a percentage of the retail price, as those prices rise, so do tax revenues. 

Personal income tax revenues

The personal income tax is the largest general fund revenue.  Prior to taking a dip of nearly 9 percent in fiscal 2019-20 over the previous year, personal income tax collections had been robust with growth of 5.2 and 5.8 percent, respectively, over the two previous fiscal years.  Keep in mind that in fiscal 2019-20 the deadline to file personal income taxes was moved to July 2020 and, thus, into the next fiscal year (2020-21). 

Likewise, the jump in fiscal 2020-21 to $16.28 billion lifted the revenue 26.9 percent above the $12.84 billion collected in fiscal 2019-2020. The figure is bit misleading because of that postponement.  July 2020 collections of $2.31 billion were above normal by about $1.5 billion compared to the average from July 2012 to July 2019 ($835 million).  For the current fiscal year (2021-22), the monthly average through the first seven months is $1.23 billion, which puts it on pace to reach $14.8 billion—9 percent lower than last fiscal year but the second-highest collection since fiscal 2012-13. Bear in mind, there has been a significant jobs recovery since late 2020. 

Statewide labor statistics

Another factor has been the rise in wage levels as businesses struggle to hire workers and entice people back into the labor market.  Statewide, the private sector’s annual average hourly earnings in 2019 was $26.16—an increase of 1.6 percent over 2018.  It then jumped 4.4 percent to $27.30 in 2020 and again 3.9 percent to $28.37 in 2021. From 2019 to 2021, the annual average hourly earnings increased by 8.5 percent.  This obviously helps the commonwealth’s personal income tax collections. 

Bear in mind, however, that total private jobs statewide have yet to recover to 2019 levels, notwithstanding a partial rebound from the pandemic depressed level.  In 2021, the annual monthly average number of total private jobs came in at 5.044 million, 5.9 percent lower than the 5.36 million counted in 2019.  This is the lowest number—other than 2020’s pandemic level—recorded since 2013’s 5.02 million. 

Conclusion

Flush with cash, the governor’s initial budget proposal contains large spending increases for most categories, especially education.  But this boost is more the result of federal government stimulus spending that spurred on inflation rates not seen since the early 1980s.  It is certainly not due to any growth-enhancing policies out of Harrisburg.  What happens when the Federal Reserve acts to slow inflation by drastically choking money growth and raising interest rates?  When future collections fall as the economy contracts, will tax rates have to be raised or new levies created to make up the shortage? 

Nothing is being done to address the terrible business climate in Pennsylvania—fealty to unions, stifling regulations and high taxes.  These are things, that addressed properly, would engender real economic growth.  

The spending increases being proposed do nothing more than raise the floor on which future budgets will be based, tying the hands of future governors and legislators—and emptying the pockets of Pennsylvanians. 

We have seen this happen before.  It is not a good thing for the state.