The Monthly Report - February 2023 - Appropriations Committee

The Highlights

General Fund revenues were $205.6 million lower than estimates in January.
Much of the shortfall resulted from the implementation of a new revenue reporting software system, which created a delay in posting Personal Income Tax revenues.
Revenues are still nearly $300 million ahead of estimate for the 2022-23 Fiscal Year.
In the IFO’s latest budget outlook, General Fund revenues for the upcoming budget are projected to be $270 million lower than their last forecast in November 2022.
The state’s Rainy Day Fund balance of just over $5 billion equates to 11.6% of total General Fund expenditures, just below the national average of 12.4%.

January Revenue Collections Impacted by Lagging PIT Quarterly Payments

General Fund revenue collections for the month of January were below estimate by $205.6 million, or 5.5%. General Fund tax revenues were $231.3 million, or 6.2%, lower than the monthly estimate, but non-tax revenue exceeded the estimate by $25.7 million. General Fund revenue collections for the fiscal year are $297.5 million, or 1.3%, ahead of estimate. As happened in late November, the Department of Revenue’s implementation of its new Pennsylvania Tax Hub (PATH) software had an unintended impact on January’s revenue postings. Approximately $93.5 million of General Fund deposits was not posted in January and will be carried over and posted to February. The Motor License Fund realized a much smaller impact of approximately $800,000. Absent the PATH posting delay, General Fund revenues would have been $112.1 million below the monthly estimate.

Final quarterly estimated personal income tax (PIT) payments for the 2022 calendar year were due in January. These payments were $180 million short of projections for the month. We will know in the coming months whether the shortfall in January’s quarterly payments will carry over into weak annual PIT payments when 2022 tax returns are filed this spring.

General (i.e., non-motor vehicle) sales and use tax collections were below estimate by $6 million, or 0.5%, for the month. January’s general sales and use tax collections are the highest of the fiscal year because the taxes collected in December, during the peak of the holiday shopping season, are remitted in January. So, it appears Pennsylvania’s retail sector nearly met expectations during its all-important holiday season.

January 2023 General Fund Revenue vs. Monthly Estimate:

Corporation taxes were $13.8 million, or 6.6%, above estimate.
Sales and use tax (SUT) collections were above estimate by $11.6 million, or 0.9%, for the month.
- General SUT collections were $6 million, or 0.5%, below estimate.
- SUT collections on motor vehicle sales were $17.6 million, or 18.7%, above estimate.
Personal income tax (PIT) collections were below estimate by $243.7 million, or 12.3%, of which approximately $71 million of the shortfall was caused by the PATH posting delay.
Realty transfer tax collections were $17.1 million, or 23.5%, below estimate. RTT collections were largely unaffected by the posting delay.
Inheritance tax collections exceeded the monthly estimate by $4 million, or 3.3%.
Non-tax revenues exceeded the monthly estimate by $25.7 million. As in previous months, Treasury investment income continues to outperform estimates due to larger fund balances and higher interest rates being earned on those funds than anticipated.

Fiscal Year 2022-23 vs. the Official Revenue Estimate To-Date (Amounts Impacted by PATH Delay):

Total General Fund revenue is $297.5 million, or 1.3%, above estimate.
General Fund tax revenue is $183.8 million, or 0.8%, above estimate.
Non-tax revenues are $113.7 million, or 42%, above estimate.
Corporation taxes are $342.4 million, or 13.1%, higher than the estimate.
Sales and use taxes are $146.4 million, or 1.8%, above estimate.
- General SUT is $105 million, or 1.4%, ahead of estimate for the year-to-date.
- SUT on motor vehicles is $41.4 million, or 5.5%, ahead of the estimate thus far this year.
Personal income tax collections are below estimate by $216.6 million, or 2.3%.
- PIT withholding is $75.7 million, or 1.1%, less than the estimate. Employer withholding tax was most impacted by January’s posting delay ($69.1 million carried over to February). After accounting for the delay, withheld PIT is approximately $6 million short so far this fiscal year.
- Non-withheld PIT (i.e., estimated and annual payments) is $140.9 million, or 6.2%, below estimate.

Fiscal Year 2022-23 vs. Fiscal Year 2021-22:

Total General Fund revenues through January 2023 are $2.88 billion, or 11%, lower than last year at this time because of a one-time transfer from the federal Coronavirus State Fiscal Recovery Fund in the amount of $3.84 billion that occurred in November 2021.
General Fund tax revenue is $867.8 million, or 3.9%, higher than last year.
Corporation taxes are $296.6 million, or 11.1%, higher.
Sales and use tax collections are $172.9 million, or 2.1%, higher than last year through January. So far, this fiscal year $301 million from sales tax on motor vehicle sales has been transferred to the Public Transportation Trust Fund.
Personal income tax collections exceed last year’s collections by $585.6 million, or 6.8%. $45 million was transferred from PIT in July 2022 to the Election Integrity Restricted Account.
Non-tax revenues are $3.75 billion less than last fiscal year through January because of last year’s $3.84 billion transfer from the federal Coronavirus State Fiscal Recovery Fund to the General Fund for revenue replacement in accordance with federal law.

Motor License Fund:

Motor License Fund revenues are above estimate by $22.8 million, or 1.4%, through January.
Motor License Fund revenues are $11.7 million, or 0.7%, lower than last fiscal year at this time.

IFO Releases its Mid-Year Update

The Independent Fiscal Office (IFO) released its Fiscal Year 2022-23 Mid-Year Update on January 31, 2023. For the current fiscal year, the IFO projects additional General Fund revenue of $27 million as compared to its November 2022 Economic and Budget Outlook forecast.

For the upcoming 2023-24 budget year, the IFO projects General Fund revenue of $44.58 billion, which is a $270 million decrease from its November 2022 forecast of two months ago. The following table lays out the differences in the IFO’s FY 2023-24 forecast between November 2022 and January 2023:

Millions

The full report is available on the IFO’s website at the following URL:
IFO – Releases (state.pa.us)

Strong Rainy Day Fund Remains a Top Priority

Making deposits into the Commonwealth’s Rainy Day Fund has been a continuing policy priority for the Senate Republican Caucus. As recently as Fiscal Year 2017-18, the fund was depleted. Unprecedented revenue growth coming out of the Covid-19 pandemic placed the Commonwealth in position to make significant deposits into the fund. The past two fiscal year budgets have included deposits of $2.6 billion and $2.1 billion, respectively. The current fund balance of just over $5 billion equates to 11.6% of total General Fund expenditures and is just below the national average of 12.4%. Continued contributions to further increase the fund balance not only puts the Commonwealth in a better position when needing to respond to unforeseen financial circumstances but also improves the Commonwealth’s standing with the bond market and rating agencies and can decrease interest costs when debt is issued.

22-23 balance in the chart should be $5,032 as of January 31; Y axis title should be “In Millions”