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Current Year Revenues
The estimated revenue shortfall for the current year has risen from $2.217 billion to $3.167 billion, an additional decrease in revenues of $949.5 million over the January forecast. Estimates are for General Fund collections to fall an unprecedented 10.8% below what was collected in FY2007-08. Looking over collections data dating back to 1971, the state has never experienced a fall-off in collections of this magnitude. Of the last two recessions, only the 2001-02 baseline shortfall was of major significance at 6.2%.
Most of the change in the May forecast is due to an unparalleled fall in April income tax collections. April 15 final payment checks fell 39.7%. A primary reason is the widespread impact of the recession. Declines in all sectors of the economy have accelerated losses in income, especially from capital gains in the equity and real estate markets. The January forecast envisioned a decline in final payments of 25%, which was greater than the last two recessions (20-21%), but nowhere close to the 39.7% decline actually experienced this April.
In many years a “ballooning” effect can occur at this time of the year when first-quarter estimated income tax payments from high-income individuals track the final payment experience. For example, estimated tax payments fell 40.7% this April. This compares to the 29.1% decline in January.
The revised sales tax estimate is essentially the same as the January estimate. The reason is the growth of this tax has slowed at the expected rate. Baseline sales tax collections for the year are expected to finish down 6.5% over last year. Heavy losses for the first and second quarter of 2009 of 9% will result in a baseline loss of 6.5% for the fiscal year.
Withholding tax receipts on wages and salaries rise and fall more gradually than some of the more volatile taxes. The January forecast had built in slower growth for the latter part of the year due to the continued employment losses. Therefore, little change was made to withholding in the April update for the rest of the fiscal year. Through April withholding receipts are down 1.6% and this downward trend is expected to continue.
Outlook For The 2009-11 Biennium
The recession that began in December 2007, spurred by the housing market downturn, spread throughout the economy during 2008. The global financial market collapse in October 2008 sent an already contracting economy into a prolonged and severe recession. It appears now that the worst may be behind us, but there remains a long way to go. Based on the latest survey of national forecasters, compiled by the Wall Street Journal, indications are that an economic recovery is unlikely until the last quarter of this year. We agree with most of these and other analysts that the economic recovery is still 4 to 6 months away and the State’s experience will track closely with the national picture. This recession stands to be the longest economic contraction since the Great Depression.
Employment has always been a lagging economic indicator, not changing direction until well after the turn in the business cycle. This means, in North Carolina, employment gains may not occur until the end of 2010. Since the January forecast, employment outlook for the state has been downgraded. Employment is now expected to experience losses closer to 3% in FY 2009-10 rather than 1%.
Employment is closely tied to personal income and employment losses from layoffs and cutbacks by key businesses such as the financial sector have dampened the prospects for income growth over the biennium. The January forecast envisioned 2.1% and 4.9% growth in personal income for the respective fiscal years. Those numbers have been lowered to a negative 0.3% (-2.5% in wage & salary) and positive 2.4%, respectively.
During the last few years, retail sales in North Carolina closely tracked the fortunes of the residential real estate market and consumer confidence. Reasons included gains from the sale of homes, the ability to increase financial resources from home equity loans and mortgage refinancing, and the increase demand for furniture and appliances for new homes. Sales in the foreseeable future will not be fueled by wealth from real estate. Plus, with tighter credit, lower employment, and stagnant or falling wages sales tax collections will continue to fall the first part of the biennium with only a modest rebound expected in 2010-11. The forecast has baseline sales taxes falling in 2009-10 by 4.0% and a mild up-tick of 2.1% the following year.
A key reason for another year of volatile April income tax revenue was capital gains on stocks and real estate. We think these were down 35% for 2008, following a 27% increase in 2006 and 34% in 2007. During the past cycle an unusually large share of the rise was due to real estate. This sector continues to be in decline, plus at the same time stock prices had fallen by nearly 40% at the end of 2008. The forecasting challenge is to acknowledge the long-term historical pattern of capital gains: a couple of years of hyper-growth is always followed by steep declines. For this reason the revised revenue forecast assumes another year of large losses eroding any gains with another 40% drop for the 2009 tax year and as losses continue to mount a cautious 20% decline for 2010 tax year.
Corporate profits are expected to decline through 2009. Rapid depletion of inventories has helped some businesses going into the rest of 2009 and 2010, but the severe global recession will assure weak demand for products even after the U.S. begins its recovery. Corporate income is always very volatile with yearly swings by as much as 30% to 40%. Through April, corporate income tax collections were down about 18%. For the upcoming biennium we think these receipts will be flat reflecting the very mild economic recovery, plus the losses from the lengthy recession will continue to be taken against the bottom line.
Putting all these assumptions together leads to an estimated 1.9% lower baseline of General Fund revenues in 2009-10, and 3.2% growth in 2010-11. These rates compare to 9.2% in 2006-07, 3.1% in 2007-08 and the current unprecedented projection of -10.0% for 2008-09.
The revenue outlook for the 2009-11 biennium reflects a continuation of a severe and prolonged economic slowdown, with only a mild, slowly developing, recovery in 2010. Employment will lag behind the recovery and revenue collections will lag behind improvements in the employment picture. Therefore, the prospects for revenue collections to return to long term growth patterns is not expected any earlier than 2011.
Notes
_Members of the House officially honored the life and memory of Roscoe Jacobs, Sr., former Chief of the Waccamaw Siouan Tribe, with a resolution on Wednesday (HJR 343). Chief Jacobs not only worked for the betterment of his tribe but also for his community, actively participating as a member of numerous organizations, including the Columbus County Chapter of the American Red Cross and the North Carolina Commission of Indian Affairs. Chief Jacobs died on January 27 at the age of 86.
_Members of the State Employees Association of North Carolina gathered at the General Assembly on Tuesday to lobby lawmakers working on next year’s budget.
Please remember that you can listen to each day’s session, committee meetings and press conferences on the General Assembly’s website at www.ncleg.net. Once on the site, select "audio," and then make your selection – House Chamber, Senate Chamber, Appropriations Committee Room or Press Conference Room.
