November state revenue short again; economists see modest improvement

State tax collections have totaled $123.2 million less than expected in the past four months and economists told state officials Tuesday that only modest improvement in revenue is expected in the coming year.

Finance Commissioner Larry Martin reported that November state tax collections totaled $798.9 million – 3.99 percent more than in November, 2012, but still $22.1 million less than projected when the current year’s state budget was enacted.

The state budget is based on a “fiscal year” beginning July 1 and collections have been below estimates each month since it began. Though the November shortfall was less than in the previous three months, the total shortfall for the year is now $123.2 million, Martin said.

A panel of economists, including Dr. William Fox of the University of Tennessee Center for Business and Economic research, gave their estimates of tax collections in the coming year Tuesday to the State Funding Board. Martin is a member of the board, along with state Comptroller Justin Wilson, Secretary of State Tre Hargett and state Treasurer David Lillard.

The board is to analyze the projections, come up with a consensus estimate at a meeting next week and present it to the governor and Legislature for use in planning next year’s state budget. The economist estimated that tax growth would run anywhere from 2.2 percent to 3.5 percent in the coming year.

Fox estimated 2.6 percent, which translates into about $260 million in new revenue next year. Haslam has already said that rising costs of TennCare and education will eat most increases in revenue growth for the coming year. In recent budget hearings, he asked department heads to suggest cuts of up to 5 percent in their operations for his consideration.

“It’s going to be a tight budget,” said House Finance Committee Chairman Charles Sargent, R-Franklin, after hearing the reports. Senate Finance Committee Chairman Randy McNally, R-Oak Ridge, echoed the view.

Both men, however, said they have no regrets about supporting legislation to repeal, in stages, the state’s inheritance tax and gift taxes last year and to reduce the Hall income tax on some dividends and interest and the sales tax on grocery food. The revenue loss from the tax cuts would roughly offset the $123 million shortfall so far this year, but the Republican lawmakers said they believe the effect of tax reductions will be a positive in the long run.

Both chairmen said they expect new budget cuts will be needed and will look to Haslam for recommendations on where they should be made.

House Democratic Caucus Chairman Mike Turner said the revenue figures “show the Republican war on workers is failing to produce jobs or growth” as Tennessee continues with one of the highest unemployment rates in the nation and our sales tax growth is lower than nearly all of our neighbors.”

Turner said Haslam’s refusal to accept Medicaid expansion in Tennessee will be another blow to the state economy, harming hospitals as well as citizens – he estimated 330,000 – who would otherwise receive health care insurance.

Fox and the others speaking to the Funding Board – Dr. Albert DePrince, a Middle Tennessee State University professor of economics and finance; Robert Currey, chief economist for the Legislature’s Fiscal Review Committee, and state Revenue Commissioner Richard Roberts – voiced some concern about sluggish sales tax growth, which accounts for about 60 percent of state revenue. They also noted that franchise and excise taxes from businesses are running well below estimates.

Fox said he does expects the revenue in the next eight months to rebound somewhat and basically match earlier projections for the remainder of the fiscal year, leaving a shortfall of about $125 million or roughly where it stands now when the fiscal year ends next June 30.

The UT economist said he was somewhat surprised that Tennessee’s sales tax growth is running below that of neighboring states. On the other hand, Tennessee’s business tax collection growth has been running above national averages, though it has dropped substantially in the past four months and now accounts for much of the shortfall.

Note: The F&A news release on November revenue collections is HERE. Link to revenue collection tables is HERE.