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S Oenaral fund and 351*724 state equalization L73afrs revenue report 1984- CLeLgAisYlTaOtiNveSFCiHscEaNlCAKnalyst Room 105 • StateCapitol P.O. Box201711 Helena, Montana59620-1711 (406)444-2986 STATE OF MONTANA FAX(406)444-3036 Office of the Legislative Fiscal Analyst DATE: May 27, 1994 TO: Legislative Finance Committee FROM: Terry W. Johnson ^V^Q^ Principal Fiscal Analyst SUBJECT: General Fund and School Equalization Account Revenue Report INTRODUCTION The purpose ofthis report is to provide the committee with a status on year-to-date revenue collections deposited to the general fund and school equalization account (SEA). Revenue collections recorded on the Statewide Budgeting and Accounting System (SBAS) through May 25, 1994, as compared to May 31 oflast year are used throughout this report. The revenueestimatescontained in HouseJointResolution 2 (HJR 2) ofthe November 1993 special session are also referenced. These estimates have been adjusted for legislation enacted by the special session. REVENUE DISCUSSION Total general fund and SEA collections through May 25, 1994, were $734.3 million or 84.2 percent of the fiscal 1994 revenue estimate contained in HJR 2. This compares to $790.1 millionor82.9percentoftotalcollectionsdepositedin these accounts throughMay 31, 1993. Tables 1 and 2 provide a comparison of collections through May 25 of this year with collections through May 31 oflast year. Since a numberofpolicy changes occurred in both years, comparing year-to-date collections with last year can be misleading and should be viewed cautiously. Examples of policy changes include: 1) implementation of the seven percent surtax (primarily for fiscal 1993); 2) the acceleration of estimated income taxes in fiscal 1993; and 3) the implementation ofHouse Bill 671 (Income Tax Reform) withholding tables on July 1, 1993 (fiscal 1994). The seven percent surtax and the acceleration ofestimated tax increased revenues for fiscal 1993 only and were not expected to significantly impact fiscal 1994. However, new withholding tables due to the enactment of HB 671 were expected to increase revenues in fiscal 1994 and beyond. Suspension of HB 671 by petition in October 1993 is expected to increase individual income tax refunds during fiscal 1994. Whilethereare numeroustypesofrevenuedepositedtothegeneral fundandSEA, about78.6 percent of the total revenue base consists of individual income taxes, corporation income taxes, investmentsearnings, andproperty taxes. Graph 1 showsthe HJR2 revenueestimates forfiscal 1994 by these majorrevenue groupings. Based oncollection data through May 25, alloftheaboverevenuecomponentsshouldequalorexceedthe fiscal 1994revenueestimates contained in HJR 2. Although many of the smaller revenue General Fund & SEA Revenue Analysis sources are also on "target", electrical energy taxes and inheritance taxes may be below expectations. Even if collections HJR 2 Revenue Estimates For Fiscal 1994 from these two sources are less than anticipated, total general fund and SEA Income revenue collections should exceed fiscal S328.4M 37.6' 1994 HJR 2 revenue estimates. The pertinent questions at this fime are: 1) how much will collections exceed the fiscal 1994 revenue estimate; 2) what is causing stronger revenue growth; and 3) will these trends continue into the future? Unfortunately, it is difficult to answerthese SC6o0r.p8oMrat7i.o0n% questions without more current tax return Natural Resources information. The following discussion $49.0M 5.6% explains current staUstical information available and the implications ofthis data. Graph Individual Income Taxes 1 Total individual income tax collections through May 25, 1994, were $357.8 million orS29.4 million higher than the fiscal 1994 revenue estimate contained in HJR 2. While additional withholding and estimated taxes are to be received by June 30, significant refunds are expected to be issued before fiscal 1994 is complete. Based on year-to-date collection data, total individual income taxes for fiscal 1994 should exceed the HJR 2 revenue estimate. Since calendar 1993 tax returns are currently being processed, the most recenttax returnstatisticsavailable are forcalendar 1992. The following discusses our analysis of this information. Individual income tax return data for calendar 1992 showed total income for full-year residents increased by 8.39 percent over calendar 1991. The income components with the greatestincreasewerecapitalgains,rents,royaltiesandpartnerships,andnetbusinessincome. Net operating losses also fell substantially. Full-yearresident wage and salary income grew 8 percent between calendar 1991 and 1992. Table 3 shows the predicted income growth rates between calendar 1991 and 1992 as compared with actual growth rates. Full-year resident tax returns for calendar 1992 were used to prepare this table. The predicted growth in wage and salary income between calendar 1991 and 1992 was very close to the actual growth. The underestimation in wage and salary income was only .37 percent, or $19 million. Of the 8 percent in actual wage and salary growth, approximately 3.3 percent was due to an increase in the number of wage earners. Interest and dividend income was predicted to fall by 2.55 percent between calendar 1991 and 1992. The actual reduction in interest and dividend income was over 9 percent. Net business income was predicted to increase by 7.8 percent between calendar 1991 and 1992, based on forecasts by Wharton's Econometrics for U.S. business income. Actual growth in Montana's net business income was almost 15 percent. Less than a third (4.7 percent) of this growth was due to an increase in firms reporting net business income.