Factoid of the Month
The New FY 2006 General Fund Revenue Forecast
The new FY 2006 General Fund revenue forecast is $113.6 million higher than the forecast released in January 2005. This 5.4% increase is primarily due to much higher revenue in FY 2005 than was forecast last January.
Actual FY 2005 General Fund revenue was $110.8 million higher than the January forecast, with over half the excess ($61.1 million) coming from the individual income tax. The “April Surprise” took the individual income tax from being down $7.0 million at the end of March to being ahead $42.2 million at the end of April. This almost $50 million swing was driven by filing payments that set a new high water mark for growth in FY 2005.
April 2005 filing payments were expected to grow by 13.3% over the prior year but actually grew by 37.7%. The strongest April growth during the entire decade of the 90s was 18.8% in FY 1996, and growth in April FY 1988 (when the top income tax rate was increased from 7.5% to 8.2%) was 28.4%.
The picture is similar when looking at the full FY 2005 results. Filing payments were projected to grow by 9.4% but actually grew by 30.1%. Again, during the entire decade of the 90s the highest growth rate was 15.0% in FY1993. FY 2000 had higher full year growth at 15.8%, and FY 1988 grew by 27.5%. Interestingly, Idaho personal income growth in FY 2005, estimated to be 7.5%, is lower than both FY 2000 (7.6%) and FY 1993 (9.8%).
The other two pieces of the individual income tax, withholding collections and refunds, actually came in very close to the expected amounts for FY 2005. Withholding was forecast to be $848.5 million (5.4% growth) in FY 2005, but actually reached $862.0 million, for 7.1% growth. Refunds were forecast at $184.0 million (-1.0% growth) but actually came in at $189.2 million, or 1.8% growth. These results are very close to the forecasted amounts, and in essence the entire individual income tax surplus in FY 2005 is due to excess filing payments.
The following table shows the FY 2005 monthly revenue results. Several highlights jump out. First, over three-fourths of the surplus accrued in the last one-quarter of the fiscal year. Second, although the individual income tax accounted for over half the total surplus, all five of the major revenue categories came in above their respective forecasts. Finally, the largest percentage gain over the projected revenue amount was in the corporate income tax, which garnered 15.7 percent more revenue than was forecast in January.
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An oft asked question is: Why was FY 2005 revenue so strong? There is not enough information currently available to answer that question definitively (2004 final tax returns are not due until mid-October), but several very likely factors can be cited. First and foremost is the real estate boom. Tax Commission personnel have examined returns filed in April and found large payments due to a) non-residents whose Idaho real-estate transactions triggered large capital gains, and b) large payments from businesses associated with the construction industry. Proprietorships, partnerships, and sub-chapter S corporations all file under the individual income tax. This factor would also impact the sales tax insofar as construction materials are taxable, as are both home and office furnishings.
Another large factor in the unexpected surplus is stronger than expected personal income growth in 2004 (the tax year that gives rise to individual income tax filing collections). In the January forecast it was believed that 2004 Idaho personal income grew by 5.9 percent. The current estimate is that Idaho personal income grew by 7.0 percent in 2004. This is almost 20 percent faster income growth than was expected. This extra growth would impact both the income tax and the sales tax.
The following table presents the recent history and current forecast for General Fund revenues. It must be noted the reduction in forecasted revenue in FY 2006 is a consequence of the lowering of the sales tax rate from 6% to 5% on July 1, 2005.
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An alternative table has been produced that removes the effects of law changes enacted in the 2005 legislative session, and also removes the effects of the sales tax and cigarette tax rate and distribution changes. It is presented below:
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The normalized revenue forecast contains slower revenue growth in FY 2006 than occurred in FY 2005. This is due to a variety of factors:
Idaho personal income growth slows from 7.5% to 5.5%
Individual income tax growth slows from 14.8% to 5.1%
Corporate income tax growth slows from 35.5% to 12.4%
Unclaimed property collections drop from $9.8 million to $3.5 million
Estate tax collections drop from $3.3 million to $1.0 million
The last three rows of the table provide the current historic and forecasted values of Idaho personal income, the year over year percent growth, and Idaho General Fund revenue as a percentage of Idaho personal income.
It is interesting to note that the General Fund share of personal income ranged from 5.6% to 5.8% during the mid to late 1990s, surged to 6.0% and 6.2% respectively in FY 2000 and 2001, then dropped to the range of 5.0% to 5.3% in the period FY 2002 to FY 2005 (FY 2004 - FY 2005 actual shares were back up to 5.7% and 5.8% as a result of the temporary 6% sales tax).
The current forecast for FY 2006 puts General Fund revenue as a share of personal income at 5.3%. This is approximately 0.4 percentage points below the level of the mid to late 1990s. One-tenth percentage point of Idaho personal income is equal to $41 million in FY 2006.