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Projected state revenue a guesstimate at best

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Wednesday, March 2, 2011

As Gov. Tom Corbett's staff readies the state budget for his legislative address on Tuesday, it's weighing spending decisions against one big educated guess.

The state revenue estimate is the Department of Revenue's annual attempt to predict how much Pennsylvania will collect in taxes during the next year. In the past two budget years, as the recession drove down economic activity, the department overestimated revenue by more than $4.4 billion.

"Perfect accuracy -- or even near accuracy -- is very difficult," said Sarah Emmans, a researcher with the Pew Center on the States. Her Washington-based think tank released a report Tuesday detailing revenue estimate mistakes that helped states rack up some of their largest-ever budget deficits.

As of the end of February, the state collected $243.2 million more than estimated in the fiscal year that started July 1, according to figures released yesterday.

The Revenue Department referred questions to Corbett's office. Asked whether Corbett is guarding against another overestimate, spokesman Eric Shirk replied: "The governor's official revenue estimate will be provided on March 8."

The Pew report found that in recent recessions, states got worse at estimating revenue. In the 2001 recession, half the states had serious forecasting errors, defined by Pew as overestimating revenue by 5 percent or more. In 2008-09, that number rose to 70 percent.

Emmans said that was linked to the causes of the recessions.

In 2001, the tech bubble burst, driving down the value of stock portfolios. Capital gains taxes brought in less than expected, which drove down income tax revenue.

This recession was different. In addition to the stock market's tumble, joblessness rose, people cut back on spending, and corporate income fell. The three taxes states most depend on -- corporate, personal income and sales taxes -- plummeted.

"It wasn't like the early 2000s, when everybody was out buying new electronics," said Mark Robyn, economist at the Tax Foundation, a Washington policy institute that released its annual comparison of state tax rates yesterday.

Making matters worse for Pennsylvania was the state's patchwork of more than 50 sales tax exemptions, which cover a range of items such as food, clothing, coal, helicopters, horses and trout. The goal of the biggest exemptions -- for food and clothing -- is to protect the poor from paying taxes on necessities.

But when the economy sours and everyone pares budgets, necessities are the only things most people buy, Robyn said.

"Having a broad tax base means taxing everything, but it avoids being subject to some of the larger swings in the economy," he said. "If all you tax are electronics and everybody cuts back on their iPod purchases, then you're not getting that revenue."

Pennsylvania's tax rate stayed "pretty consistent over the last five years or so," Robyn said.

Pennsylvania ranks 22nd in the amount of tax money collected per capita -- $2,389 in 2009, the latest data available -- putting it between Kansas and Iowa, according to the foundation.

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