As Economy Picks Up, PA Revenues Take Turn for the Better

After months of falling short of targets, Pennsylvania's General Fund tax collections edged past the monthly estimate in February by $16 million, or about 1%. The good showing was driven largely by higher-than-expected personal income tax collections. Corporate tax collections continued to trail estimates.

The improving revenue picture for both January and February may signal that tax collections (other than corporate levies) have taken a turn for the better. There have been many signs of a growing economic recovery, including a decrease in the unemployment rate, which bodes well for many state tax streams in the second half of the 2011-12 fiscal year.

February collections trimmed the revenue shortfall for the fiscal year to $482 million, or 3%. Tax collections for the fiscal year trail estimates by $449 million.

Compared to the prior fiscal year, total tax collections are up $507 million, or 3%, as of February — another sign that the economy is improving.

Fiscal Year to Date Tax Collections Trail Estimates, Still Growing Over Prior Year

Before we break out the champagne, the continuing — and largely self-inflicted — shortfall in corporate tax collections is a cause for concern.

Corporate taxes fell 13% short of estimate in February, bringing the shortfall for the year to just under $300 million, or 18%. Much of the corporate tax shortfall can be laid at the feet of the Corbett administration's February 2011 decision to adopt the federal "bonus depreciation" — something Pennsylvania previously had not done.

Bonus depreciation is a federal tax incentive that allows businesses to write off the cost of equipment in the year of acquisition, rather than stretching it out over a period of years as is normally done. This policy seems to be much more expensive for Pennsylvania than the original $200 million estimated price tag and could exceed $700 million once the cost is finally tallied.

March is far and away the most important month for corporate tax collections. It is expected to account for 44% of the fiscal year's total corporate collections. If corporate tax payments fall short of this target — and all indications are that they will — the state's improving revenue situation could get a bit gloomier. 

The best hope for the rest of the fiscal year is that personal income and sales tax collection growth can offset what seems likely to be a further erosion of corporate tax collections.

Pennsylvania should learn from its mistakes and reverse this counterproductive bonus depreciation policy. While federal bonus depreciation drops from 100% to 50% in 2012, Congress may increase it back up to 100% this year. If this happens and Pennsylvania does nothing, the state should expect to lose millions more to this ineffective business tax break.

And that will trigger more cuts to education, health care, and environmental protection at a time when these services are critically needed to foster the state's economic recovery.

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