Commission on Government Forecasting and Accountability
Robert Pritchard, Co-Chair
Donne Trotter, Co-Chair
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June 2017 Monthly Briefing
REVENUE: FY 2017 Receipts Drop $968 million on Weak Federal Sources As Other Revenues Finish Close to Expectations
Jim Muschinske, Revenue Manager

Overall base revenues dipped $14 million in June. While personal income tax receipts fell, an increase in corporate income tax receipts managed to offset most of those declines. In June of last fiscal year, the IDoR made substantial adjustments to the allocations of corporate income taxes, thereby resulting in a significantly suppressed total. As a result, this year’s positive performance was due more to that artificially low month one year earlier. June had the same number of receipting days as last year.

For the fiscal year, base general funds dropped $968 million or 3.2%. As discussed in earlier briefings, receipt weakness was widespread, and resulted in disappointing performances in key areas such as income and sales taxes as well as federal sources.

For the fiscal year, gross corporate income taxes were off $728 million, or $644 million net of refunds. Part of that decline was due to the IDoR now classifying pass-through withholding under the personal income tax designation rather than corporate. Because of this change, approximately $375 million gross, or $324 million net was moved from the corporate income tax line. Also significantly impacting corporate income taxes were the reconciliations made by IDoR’s during the move to their new accounting system. It is hoped that normalized receipt patterns will be reestablished as they caused significant difficulty in interpreting receipts in FY 2017. Inheritance tax, true to its volatile nature, declined $45 million. Public utility taxes were off of last year’s pace by $42 million while insurance taxes and fees dipped $7 million.

ECONOMY: Interest Rates Rise Again
Edward H. Boss Jr., Chief Economist

Interest rates edged as the Federal Reserve in June raised the key federal funds target for the third time this year to a range to 1.0% - 1.25%. The creeping up of the key federal funds rate replaces the prolonged period of quantitative easing and almost zero interest rates that began in late 2008. Moreover, recent increases in the federal funds rate are likely to continue.

The additional credit tightening comes in spite of the Fed having met its targets set for inflation and unemployment. The Federal Reserve noted in its press release that the Committee’s objective was a 2% inflation rate while in February 2014, then previous Federal Reserve Chairman Bernanke stated that it would keep interest rates low until unemployment falls to around 6.5%. Currently, the unemployment is at 4.3% while the inflation rate on a 12-month basis has declined recently with the measure excluding food and energy prices running somewhat below 2%.

Many forecasters are calling for a pick up in the pace of the economy from the first quarter’s slowdown and it is unlikely that energy prices will continue to weaken in this environment. Moreover, still uncertain is the possible inflationary effect as the Fed begins to unwind its balance sheet with the more than $4 trillion in bonds bought in response to the financial crisis. This brings up the question of whether the Federal Reserve has waited too long to begin to normalize credit conditions or if, as has occurred in the past, it overstayed its prolonged period of ease, sparking an acceleration in prices in a strengthening economy.
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