It Is Hard To Make Predictions, Especially About Future Taxes

In The Great Crash: 1929, John Kenneth Galbraith wrote, “The singular feature of the great crash of 1929 was that the worst continued to worsen.”  That singular feature seems to apply equally today.  As we enter 2009, we are now halfway through a very challenging fiscal year and Mayor Nutter is still working to re-balance his current budget in the face of the deteriorating economy while, at the very same time, he is crafting his budget proposal for fiscal year 2010 which begins on July 1st.  It is hard to make predictions even in the best of times, but with the proper warnings about predicting the future in effect, BUDGETWATCH presents our mid-year view on city tax collections and projections.  We see tax revenues off by more than $100 million from last year and more than $30 million lower than estimated in Mayor Nutter's budget rebalancing plan projections.

In Fiscal Year 2008, which ended on June 30, 2008, the city collected $2.41 billion in locally generated taxes.  The budget adopted last spring for the current fiscal year estimated that the city will bring in more than $2.44 billion in tax revenues, but as economic conditions deteriorated, the city lowered that estimate to $2.32 billion this fall.  Based on tax revenue trends and collections from recent years, we can now make some informed tax-revenue projections.

The Wage Tax brings in nearly half of all locally generated taxes so it is a very important revenue stream for the budget.  Because the tax is deducted from pay checks of Philadelphians and those employed in Philadelphia, it is possible to monitor collections throughout the year, which helps BUDGETWATCHER monitor the fiscal state of the city.  To date, despite the economic downturn and the nearly quarter-percent rate reduction enabled by state gaming revenues, Wage Tax revenues have approached last year’s collections.  However, that growth has slowed.  Adjusting for the rate cut, collections were up by more than 4.5 percent for the first quarter of the fiscal year, but by less than 1.6 percent for the second quarter.  With this slowdown, and mindful of the fact that the third quarter of the year tends to be the period when the Wage Tax generates the most revenue for the city, projections should be conservative.  Total fiscal year 2009 Wage Tax revenues may total $1.152 billion, approximately $13 million higher than estimated by the Mayor’s budget rebalancing plan.

More good news might be found in the Real Estate Tax, which brings in about 17 percent of tax revenues.  As the only tax where the city starts the tax year with a firm idea of how much is owed (the city sends out the bills based on the city’s own estimate of property values), collections are much easier to estimate.  Despite the economic woes, overall Real Estate Tax assessments are increased slightly this fiscal year and while there is pressing need to fix the overall fairness in the assessment system, this stability will likely yield collections of $410 million, which will be more than last year, but about $13 million less than estimated by the budget rebalancing plan.

One big reason for concern when it comes to tax revenues is the city’s Real Property Transfer Tax, which saw dramatic increases in collections with the growth in the real estate market in recent years.  But, what went up has definitely come down.  The city generates about 8.0 percent of total locally generated tax revenues from the levy, which brought in $186 million last fiscal year.  Off by 33 percent through half the year, the city may be lucky to generate $120 million this fiscal year, about $35 million less than estimated by the rebalancing plan.

In the face of the economic turmoil, the Sales Tax, which generates more than 5.0 percent of tax revenues, has actually remained quite stable.  Originally budgeted to generate more than $139 million, the tax will likely generate a little less than the $133 million estimated by the rebalancing plan.

Collections for the city’s other taxes (the Parking Tax, Amusement Tax, Valet Parking Tax, and Outdoor Advertising Tax) together generate less than 4.0 percent of total tax revenues.  Fueled by the Phillies World Series drive, the Amusement Tax projects to be up this year and these taxes together will likely only generate approximately $90 million to meet estimates of the rebalancing plan.

The wild card in predicting tax revenues for this year will be the Business Privilege Tax, which accounts for about 18 percent of city tax revenues.  Unlike the Wage Tax revenues, which can be tracked throughout the year, most BPT revenues arrive just after tax day so the tax defies easy prediction.  Because the tax is actually two separate levies (a tax on gross receipts and a tax on net income), one can use Sales Tax data to help estimate gross receipts, but estimates about business net income tend to be more of a guessing game than a scientific estimate.  Despite the fact that Sales Tax revenues were up last year, which would seem to suggest that Gross Receipts Tax revenues would be up; and despite the fact that Wage Tax revenues increased last year, which would seem to indicate that firms were still generating positive net income, BPT collections DROPPED significantly — by almost 10 percent — last year.  This was the very first sign that the international economic woes were taking a toll on Philadelphia tax revenues.  Budgeted to generate $436 million last year, the BPT returned just $401 million year.  The rebalancing plan estimates the levy will generate only $385 million, but, given the deteriorating economic situation, even that might be optimistic.

Added up, projections for collections suggest the city will bring in only $2.29 billion in locally generated tax revenues, nearly $118 less than generated last fiscal year and about $34 million below the rebalancing-plan projections.  Of course, if the worst is over, we could see an improved tax-revenue picture in the coming months, but if the worst continues to worsen, the Mayor will have to RE-rebalance his fiscal year 2009 budget at the same time as he tries to create a balanced budget for fiscal year 2010.