Jobs and State Tax Revenue Still Tied Together

Summary: In a recent Policy Brief, we discussed the Lincoln Institute of Public Opinion’s spring business climate survey and noted how it struck a more optimistic tone compared to previous surveys.  But is this optimism based on actual performance or simply a better attitude?  There appears to be some pickup in employment but as of yet it is not strengthening appreciably.

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 The statewide employer payroll data, seasonally adjusted, indicates that March 2017’s level of total non-farm employment is about one percent better than one year ago.  In fact since September 2016 the non-farm employment levels are about one percent higher than the twelve month earlier levels for each month.  However, prior to that, from January 2015 to August 2016, the year over year increase was less than one percent each month with the exceptions of March and April 2015.  While the recent pickup in growth is not eye-popping, it does show slow acceleration over the past few months, perhaps reflecting business optimism.

Statewide employment levels in the goods producing industries (manufacturing, construction, mining and logging) appeared to be slowing their losses in the last several months.  For instance, the levels for January and March 2017 are less than one percent below what they were in 2016, with February’s level slightly better than February 2016 (up 0.10 percent).  The smaller losses in goods producing jobs can be traced to a leveling off in mining jobs following a sharp decline through the early part of 2016.  Construction continued to add jobs in March, tacking on an almost three percent gain. Unfortunately, manufacturing employment has yet to shift to a growth path.

On the other hand, service providing industries that are comprised of industries such as education and healthcare, professional and business services, leisure and hospitality, and trade, transportation, and utilities have continued to post gains. From March 2016 through March 2017 service industries added just over 60,000 workers to payrolls, a rise of 1.25 percent. After a slowdown in 2015, the service industries returned to the one percent growth range in 2016 and appear to have picked up the pace slightly in recent months.

However, retail has not fared well of late. In March 2017, the seasonally adjusted level of employment in the statewide retail sector was 0.85 percent below March 2016.  And the weak retail jobs numbers extend back for some time.  Indeed, the March 2017 posting is below the early 2011 level as recovery from the last recession got underway and is 35,000 jobs under the 1990 reading.

As we have been documenting during this fiscal year, revenue collections for the Commonwealth have not been keeping pace with their projected levels. And through March with three quarters of the fiscal year completed this pattern has not changed.  The year to date collection is 0.7 percent higher than the revenue for the first nine months of the last fiscal year. But the nine month total continues to trail the budget’s projected level. After the first quarter of this fiscal year, general fund revenues were below projections by over $218.5 million.  After three quarters, that gap has widened to more than $679.3 million or three percent below official estimates.

The corporate net income tax has the widest gap between what has actually been collected through three quarters and the projected level—$1.738 billion vs. $1.974 billion, a difference of twelve percent.  Indeed, this year’s nine months of collected revenue has fallen almost seven percent behind the $1.864 billion collected through the first three quarters of the previous fiscal year.

The personal income tax also lags its projected level by 1.62 percent so far in this fiscal year ($8.684 billion vs. $8.828 billion). On a year to date basis however, it is above the fiscal 2016 collections by just over one percent.  Keeping in mind that April is the biggest revenue month for this tax, revenue may rebound when April’s data becomes available.  But given the trend of not keeping up with its projected level, it is far from certain that will happen.

The sales and use tax is also trailing its projected level through three quarters of the fiscal year.  It was projected to collect $7.488 billion but the state has only actually collected $7.356 billion—a shortfall of 1.76 percent.  But, like the personal income tax, it is ahead of fiscal 2016’s year to date level by 1.5 percent.

The Pennsylvania economy, as measured by seasonally adjusted employment levels, has been plodding along with slow growth in non-farm jobs.  While recent growth has been slightly faster since September 2016, it is still struggling to shift to a higher sustained pace, especially with manufacturing weakness and mining still yet to launch a full recovery. While job growth of any kind is welcome, when much of it is lower wage employment, the effect on incomes and profits can be felt. This is being reflected in the amount of tax revenues being collected by the state.  The corporate net income tax is struggling to match last year’s pace let alone meet budget projections.

The improvement in business optimism and consumer optimism bodes well for the Pennsylvania economy. But hard realities must still be faced. Very high fuel taxes, the pension crisis facing the state, school districts and the two largest municipalities, labor legislation that is increasingly out of step with much of the nation where 28 states have now adopted right to work laws and many have significantly lower corporate taxes.  A stronger national economy will help Pennsylvania, but much more needs to be done to improve the regulatory and policy environment in the Commonwealth.

State Jobs and Revenue Gains Very Weak in Recent Months

Summary:  The State’s fiscal situation is closely tied to its economic growth.  As the economy grows jobs, tax receipts from firms and individuals grow.  This Policy Brief looks at the recent dramatic slowing in job gains in the Commonwealth and the accompanying weakness in state tax revenue.

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The Pennsylvania economy has been plodding slowly along as evidenced by the weakening jobs numbers since March of this year.  Job growth is not only a measure of the economic wellbeing of the Commonwealth; it also affects the amount of tax revenue the State can expect to collect.  When job gains weaken, so will tax collections. For the first quarter of the current fiscal year (2016-17), Pennsylvania’s revenues have borne out this relationship as total general fund revenues, and many of the subcategories such as corporate net income, and personal income, are running behind the year earlier pace. And, more importantly they are coming in below the State’s official estimates for the current fiscal year.

 

Recently released labor data for September put the seasonally adjusted unemployment rate at 5.7 percent, up almost a percentage point from the March rate of 4.9 percent and a full point since January’s 4.6 percent rate. Over the same six month period, the household survey data show the number of people reporting they were working had fallen by 34,000.

 

The establishment survey payroll data show a similar pattern.  Over the last six months, nonfarm employment was essentially flat rising very slightly from March (5,894.6 thousand) to September (5,895.2 thousand).  Meanwhile, private sector jobs fell by 3,000 during that time. In contrast, in the preceding six months from September 2015 to March 2016, private employment rose by 51,000.  It is important to note that Pennsylvania’s private employment in September was only a tiny 2.8 percent higher than the pre-recession level of September 2007. It took seven years for employment to recover to pre-recession levels.

 

It is virtually axiomatic that a slowing in job gains will translate to weaker revenue growth for taxing bodies.  Indeed, in the first quarter of the State’s current fiscal year (July through September) total general fund revenues fell slightly compared to the same quarter of the previous fiscal year (-0.21 percent).  Of the three most important revenue streams (corporate net income, personal income, and sales and use taxes) only the sales and use tax amount is ahead of last year’s pace (0.19 percent).  The personal income tax, the largest of the three, is trailing last year’s collections by 2.4 percent while the corporate net income tax is down 7.6 percent.  The corporate tax is problematic because it is a tax on corporate profits and if profits are down, hiring new employees is less likely, and the firm may be in danger of having to do layoffs. Note that a sizable jump in the cigarette tax (owing to the dollar per pack tax hike) has kept the general fund revenue decline from being even greater.

 

Even more problematic for the Commonwealth is that actual revenue collections are significantly below estimated figures prepared for the budget. Through the first quarter of the current fiscal year total general fund revenues were $6.614 billion.  The State’s estimate was for collections of $6.833 billion resulting in a $219 million shortfall relative to forecast.  Corporate net income taxes are off by more than $67 million ($529.2 million actual vs. $596.9 million estimated).  The estimates were a little closer for the personal income tax with $2.731 billion actual vs. $2.786 billion estimated, and for the sales and use tax, revenue was overestimated by $72.4 million ($2.495 billion actual vs. $2.567 billion estimated).  Obviously, unless the first quarter performance is dramatically improved in the months ahead there will be a major budget problem early in 2017.

 

The cigarette tax had the largest revenue increase compared to the first quarter of the previous fiscal year owing to the $1 per pack boost from $1.60 to $2.60.  For the first quarter of the current fiscal year, the State has collected $279.7 million, up by $32 million from a year earlier. However, the collections are below the State’s estimate of $289.4 million, a shortfall of about $10 million.

 

The July to September quarter slowing compared to a year ago is not a recent problem either.  Looking at these revenues over the last six months shows a similar pattern.  Total general fund revenues for April 2016 through September 2016 are $15.28 billion. Last year during that six month span they were $15.51 billion. In our Policy Brief from early July (Volume 16, Number 29) we noted that “The slowdown has been underway for some time but has become pronounced in the last several months. Fiscal Year to date total revenue gains for each month of 2016 have fallen well short of the increases posted for January through May in 2015. For January to May 2016, the average Fiscal Year to date rise was 1.4 percent with the May cumulative fiscal year to date a meager 0.6 percent. For the same period in 2015, the average increase was 7 percent and for May of 2015 it was 7.3 percent.”

 

The caution lights are flashing.  Pennsylvania’s job growth is flagging and that is translating into weaker collections of tax revenues. This has the potential to become a sizable problem as the fiscal year progresses if the economy and jobs do not return to significantly faster growth—and soon. In light of the decade of anemic employment gains, it would seem apparent that Pennsylvania must adopt policies that promote strong economic growth and move away from its tradition of fealty to public sector unions and its regulatory environment that hamstring businesses.