General and Road Funds exceed official estimates in FY19 by $194.5M and $59.5M

FRANKFORT, Ky. — The Office of State Budget Director reported today that annual Kentucky’s General Fund receipts rose for the ninth consecutive year while Road Fund collections have increased in each of the last three years. For the fiscal year ending June 30, 2019 (FY19), General Fund receipts totaled $11,392.7 million, which is a 5.1% increase over FY18 collections. Final FY19 General Fund revenues exceeded the official estimate by $194.5 million, or 1.7%. For June, General Fund collections declined 2.6% as strong gains in sales and gross receipts were offset by declines in the income and property taxes.

State Budget Director John Chilton was pleased with the growth in FY19 General Fund revenues, topping last year’s record total by more than $550 million. He attributed the strong fiscal performance in FY19 to the tax changes that became effective July 1, 2018, and the strength of the State’s economy.

“When we began down the road to tax reform in 2018, we made a conscious decision to lower the top income tax rates from 6% to 5% and to broaden the base of consumption taxes,” Chilton said. “That bold tax policy and our economic development efforts have combined to create an economic environment conducive to business expansion and more jobs. Strong revenue growth is an affirmation that our economic policies are working and that we struck a proper balance in the course of tax reform. Despite the minor decline in June General Fund receipts, fourth-quarter growth was a robust 8.3%. Thus, we are ending FY19 on solid footing both economically and fiscally with actual revenues in excess of the budgeted amounts. Now that we have closed the books on the revenue side of the budget, we will process the remaining FY19 expenditures to present a complete budget picture later this month.”

Revenue collections grew in all four quarters of the fiscal year. The 8.3% growth in the fourth fiscal quarter was the largest one-quarter increase since the fourth quarter of FY15. Growth rates for the four quarters were 4.5%, 2.9%, 4.6% and 8.3%. Of note among the major accounts is the modest decline in individual income revenue and the large increases in the sales and cigarette taxes. These changes are due, in large part, to legislative actions undertaken in 2018.

A summary of General Fund collections for FY19 and FY18 is shown in Table 1.

Sales and use tax receipts grew $331.9 million, or 9.2%, in FY19. Collections in this account were also impacted by legislation. The high rate of growth in this account is largely attributable to the base-broadening measures in HB 487 from 2018. This bill extended the sales and use tax to include the installation and maintenance of tangible property, as well as to specific services such as landscaping, small animal veterinary services, and extended warranty services. Receipts were robust throughout the year with the low point being Q3 when revenues grew 7.9%. Quarterly growth rates were 8.2%, 9.0%, 7.9% and 11.5%.

Table 1
Summary of General Fund Receipts
FY19 and FY18

Individual income tax receipts fell for the first time since FY10, declining 1.3 percent, due to tax law changes. HB 487 from the 2018 Regular Session affected income taxation in a number of ways. The most significant change was moving from a graduated tax bracket, with a maximum of 6.0% to a flat rate of 5.0%. The base of taxation was also broadened through the elimination of various deductions as well as the removal of the personal tax credit for taxpayers, their spouses and dependents. Among the major components of the individual income tax, withholding and declarations fell while net taxpayer refunds were lower compared to FY18 totals.  Growth rates for the four quarters were -0.7%, -4.0%, -2.2% and 1.1%.

Cigarette tax receipts were also impacted by legislation. House Bill 487 from 2018 increased the tax on a pack of cigarettes from $0.60 to $1.10, an 83% increase.  The 67% increase in revenue for the year indicates that the higher tax rate has resulted in a decrease in consumption.  Quarterly growth rates for the year were 103.1%, 69.1%, 69.4% and 64.9%.

Corporation income tax collections rose 8.7%, or $44.6 million, compared to last year while the limited liability entity tax (LLET) fell by $31.4 million for a net increase of $13.2 million. While legislation did not directly affect the LLET, there is a strong interplay between the two taxes so they are discussed together here. House Bill 487 from 2018 was expected to have a net negative impact on corporation income tax receipts. Provisions in the bill replaced the progressive rate structure with a top rate of 6% to a flat rate of 5%. This represented a tax cut for most corporations. The rate cuts were coupled with some base broadening and an update to the Federal Internal Revenue Code effective Jan. 1, 2018. This partially mitigated the negative fiscal impact of the rate reduction. Both the corporation income and LLET experienced large quarterly fluctuations throughout the year. Growth rates for the corporation income tax were -5.1%, 17.5%, -48.0% and 24.9% while the LLET had growth rates of 12.7%, -53.1%, 56.3% and -24.4%.

After six consecutive yearly declines, coal severance tax collections increased in FY19. Revenues were $3.3 million, or 3.6% above FY18 totals. Through the first six months of the year, it looked like coal would continue on its long slow decline. However, a strong second half of the year pushed receipts into positive territory. Quarterly growth rates for this account were -21.1%, -7.2%, 17.4% and 30.1%. Third and fourth quarter coal severance tax receipts were bolstered by the collection of prior year severance taxes from financially distressed companies. While the strong second half of FY19 propelled coal severance tax receipts to exceed the official estimate by $15.0 million in FY19, a return of declining quarters are expected in the future.

Property tax receipts increased 4.1%, or $25.7 million, in FY19. Real property, public service, and the omitted and delinquent property components were the primary drivers of the increase in revenues. Collections were steady for the final three quarters of the year after declining in the first three months of FY19. Growth rates for the four quarters were -9.5%, 5.5%, 5.3% and 5.2%.

Collections from the Kentucky Lottery Corporation rose $10.9 million, or 4.3% for the year just ended. That increase corresponds to a total $14.9 million greater than the official estimate. The “other” category, which includes multiple taxes and fees such as investment income, bank franchise, inheritance, and insurance premium taxes increased 9.3%, or $65.4 million, due largely to an increase in abandoned property as securities were sold in the fourth quarter. Quarterly growth rates for the “other” account were 0.9%, -0.2%, 7.3% and 29.8%.

Table 2 compares General Fund collections to the official revenue forecast.  Actual receipts were $194.5 million or 1.7 percent more than the official estimate.

Table 2
Summary of FY19 General Fund Receipts
Actual vs. Official Estimate

For the year, revenue from all of the major accounts, except one, exceeded official estimates. The corporation income tax was the only account to fall short of estimated totals. The errors ranged from -$17.0 million to $68.4 million. The two largest revenue sources, sales and use and individual income, were extremely close to budgeted levels as each were within 0.8% of the mark. The official revenue estimate was rendered by the Consensus Forecasting Group in December 2017 and then adjusted to reflect legislation enacted in the 2018 legislative session.

Sales and use tax receipts were above the estimate by 0.8%. The individual income tax exceeded the forecasted level by $17.5 million, or 0.3%. Corporation income tax receipts were below forecasted levels by $17.0 million, or -3.0%. Limited liability entity tax receipts exceeded the forecasted level by $6.5 million. Cigarette taxes were above the estimate by $36.8 million. The coal severance tax was $15.0 million percent over the official estimate while property taxes were 4.2% more than forecasted. Lottery receipts exceeded the official forecast by 6% while all other taxes were 9.8% above the official estimate.

Road Fund

Road Fund revenues for FY19 totaled $1,566.1 million, an increase of 3.6% from the previous fiscal year. Total receipts were $55.1 million more than FY18 levels as motor vehicle usage tax revenue was easily the single largest gainer. Motor fuels tax, investment income and other receipts also posted strong gains. The three remaining accounts grew $9.9 million compared to FY18 levels. This is the third consecutive year in which revenues have increased and 3.6% growth is the strongest since collections were 4.6% in FY14.

Total Road Fund collections grew steadily across the year with the exception of the third quarter when revenues were flat. Growth rates for the four quarters were 3.8%, 4.8%, 0.0% and 5.8%.

Details of Road Fund collections for FY19 and FY18 are shown in Table 3.

Table 3
Summary of Road Fund Receipts
FY19 vs. FY18

Growth in motor fuels tax receipts continues to be tepid. Fiscal Year 2019 is the third consecutive year in which collections have been in the 0.5% to 1.5% band. The tax rate has remained unchanged since the fourth quarter of FY15 so any change in revenue is the direct result of a change in consumption. Quarterly growth rates for motor fuels taxes were 1.2%, 2.6%, -0.6% and 1.1%.

Motor vehicle usage taxes rose $21.4 million, or 4.3%, in FY19. Growth rates for the four quarters were 4.9%, 6.4%, -1.5% and 7.5%.

Motor vehicle license receipts increased $8.1 million while motor vehicle operators’ receipts declined by $200,000. Investment income skyrocketed to $11.9 million – an amount not seen since FY09 while “other” income rose $6.4 million.

Road Fund collections for FY19 exceeded the official consensus estimate by $59.5 million, or 4.0%, as shown in Table 4.

Table 4
Summary of FY19 Road Fund Receipts
Actual vs. Official Estimate 

Six of the seven of the forecasted Road Fund accounts were above estimated levels with one just below.  The motor vehicle usage tax had the largest variance between actual and estimated totals. It was $20.5 million, or 4.2%, over the official estimate. Motor fuels receipts had the second largest error (in dollar terms) exceeding the estimate by $14.0 million or 1.9%. All other accounts, taken together, were $25.0 million over forecasted levels. As with the General Fund, the Road Fund ending balance for FY19 will be determined later in July.

“Our strong finish this fiscal year shows that Kentucky’s forward-thinking economic policies are working for Kentuckians,” said Gov. Bevin. “This is the kind of positive, incremental growth that will sustain the Commonwealth and allow us to continue providing vital public services, while meeting our obligations to state employees by fully funding our pension systems. I am grateful for the partnership with our House and Senate leadership, as we work together to continue growing our economy and strengthening Kentucky’s financial foundation. We are just getting started.”

The biennial budget bill establishes how excess general fund revenues will be allocated, and provides that additional funds from FY19 will be used to pay necessary government expenditures and provide additional funding to the Retired Teacher’s Health Insurance Plan and the Kentucky pension system.

Excess lottery receipts will be fully allocated to education, including the College Access Program and the Kentucky Tuition Grant Program. In addition, excess coal severance receipts will be transferred to the Local Government Economic Assistance Fund.

Additional information is available at https://osbd.ky.gov/Pages/default.aspx.