Panel says current revenues OK, warns of decline in 2011

Dec 28, 2009 — Dover Post

Doug Denison

Dover, Del. -

The latest report from a state panel of fiscal prognosticators released Dec. 21 was rosier than many expected, but officials were quick to note that though Delaware’s revenue stream seems to be on track for the moment, there’s little to indicate the state has beaten the recession.

Figures from the Delaware Economic and Financial Advisory Council show state revenues for the current fiscal year remained flat since the group’s last report in September.

That report projected revenues for fiscal year 2010 would be down more than $47 million from what was anticipated, but Acting Finance Director Tom Cook said that dip has been balanced out by spending reductions and injections of cash from key state programs.

A tax amnesty period from Sept. 1 through Oct. 30 brought in $22 million — double the amount projected — and the state reaped a surprise $26 million from unclaimed property.

Cook also said that for the time being, the state has also absorbed a decline in tax revenues attributed to the closing of the Delaware City Valero refinery in November, as well as slumping personal income tax revenues caused by falling wages and high unemployment.

“For fiscal year 2010 we are up $500,000, so that’s basically flat. That’s actually a good story because you have Valero shutting down and we obviously factored all that in,” he said.

The DEFAC report also showed corporate franchise tax revenue projections are up slightly since September — a bump Cook attributed to a tax increase that went into effect this year.

Cook said the fiscal year 2010 numbers are cause for guarded optimism.

“I think what this shows is that right now there have been some positive signs, but there is still great concern over how fast the recovery is going to be felt. Take that uncertainty along with one of major manufacturers shutting down, it’s news that we’re not out of the woods yet,” he said.

And the end of the fiscal year is still a long way off.

“This is assuming that in the last six months of the year the projections hold, if the economy goes into a dip, or we lose another major taxpayer, all that would have a great impact,” he added.

More reductions for 2011

While DEFAC may have provided state leaders with some temporary reassurance about this year’s revenues, the projections for fiscal year 2011 were less than heartening.

The panel now expects revenues to be $42.4 million less in 2011 than it thought in September. Since June, DEFAC’s revenue estimates for next year have fallen more than $100 million.

After an already steep decline, income tax revenues are expected to slip even more going into next year, and the franchise taxes that have helped buoy the general fund lately aren’t likely to hang on through 2011, said David Gregor, an analyst with the Department of Finance.

A recession often kills businesses by slowly sapping their profits and increasing their costs over a period of time, he added, and at this point in the downturn franchise tax revenues still remain somewhat steady.

But eventually, businesses will fail and that stream of money will weaken.

“Franchise taxes are a privilege tax. If we get into a bumpy period, you don’t suddenly go out of business,” he said. “You tend to get the same payments for a longer period and there’s a longer lag.”

Gregor said DEFAC’s economists thought the franchise tax would take a bigger hit in 2010. Since that hasn’t been the case, it’s safe to assume the decline in revenues won’t be as sharp, but it will be more prolonged.

“The underlying decline in the activity has been a little bit shallower and it’s going to be spread out a little longer,” Gregor said.

Revenues gained from tax increases, like the franchise tax, also tend to skew perceptions of underlying trends.

A higher tax rate means fewer taxpayers can generate the same amount of revenue. But with economic conditions eroding the tax base, increases spurred by the tax increase begin to diminish quickly.

“We’ve been increasing tax rates, so when you look at these numbers a lot of times you’re looking at lower base activity with higher tax rates,” Gregor said. “You’re definitely seeing that phenomena.”

The coming budget battle

If anyone wanted to put a positive spin on the DEFAC numbers, it would probably be Gov. Jack Markell.

But the governor knows the 2011 projections will only get worse, and if this budget season is anything like the last one, he and the General Assembly need to prepare for all the same ghosts — tax hikes, service reductions and spending cuts.

“I think what these numbers reflect is the continuing challenge were going to have,” he said. “It continues to be a difficult environment.”

As if abysmal revenue projections weren’t enough, Markell will have to make up for the loss of roughly $100 million in federal stimulus funds. That money went a long way towards plugging this year’s budget hole, but a lot of it will disappear for next year.

“The stimulus money which helped us last year, we’re losing half of it this year. That’s the way it works in our state and that’s the way it works in every state,” he said.

The governor also said the recession has led to increased reliance on public services, and the state will have to foot the bill.

“In this kind of economy there are higher costs, for example, for Medicaid, and when we have more children enrolled in school, we have to fund that,” he said. “We’ve got to do more of these things and we’ve got to do it for less money.”

Markell wouldn’t reveal what his budget plan will entail or just how drastic parts of that plan might be, but he did say it’s going to entail a combination of tax increases and spending cuts.

“We’re not going to be able to cut our way to a prosperous future and we’re not going to be able to tax our way there either,” he said. “I’ll have more to say in January.”

Email Doug Denison at doug.denison@doverpost.com