Since U.S. economic conditions started to rapidly deteriorate in the fourth quarter of 2008, The Lane Report has been providing expanded coverage of Kentucky’s economy. The January issue of The Lane Report included an update from Kentucky Gov. Steve Beshear on a projected $457 million shortfall of the enacted FY 08-09 general fund budget. That is based on a revised and lower tax revenue estimate released by the state’s Consensus Forecasting Group (CFG) on Dec. 2, 2008. (See chart 1.)
Since the CFG’s update, Kentucky’s YTD actual revenue data for the first half of FY 2008-2009 (July 1-Dec. 31) were released. December’s General Fund receipts increased 1.3 percent compared to December 2007. The General Fund’s year-to-date tax receipts were 2.3 percent greater than the first six months of receipts in FY 2007-08. (See chart 2.)
The revised revenue forecast by CFG forecast FY 08-09 General Fund revenues would decline 2.7 percent versus FY 07-08 actual General Fund revenues. The Office of the State Budget Director estimates that General Fund revenues in the last half of the FY 08-09 (Jan. 1-June 30) will have to decline 7 percent if the CFG estimate is accurate. Because of recent modifications in Kentucky’s business tax laws and rapidly changing global and U.S. economic conditions, it is obviously difficult to determine the probability of the CFG’s lower revenue estimates.
Kentucky’s December 2008 employment data (preliminary) estimates that 1.893 million people were employed compared to 1.894 million in November 2008, a decline of 1,000 employed persons.
Based on interpolation of these data, the unemployment rate in the MSAs noted on chart 3 was 6.4 percent. The state’s reported overall unemployment rate was 7.5 percent. The unemployment rate for the balance of the state is estimated to be 9.9 percent based on the foregoing data. Northern Kentucky’s unemployment rate is estimated at 6.1 percent and was included in the ‘balance-of-the state’ estimate of 9.9 percent. Deleting Northern Kentucky with a lower unemployment rate would push the ‘balance of the state’ unemployment estimates to over 10 percent.
The three largest components of the state’s tax revenues are sales and use taxes, individual and corporate income taxes, and property taxes (see chart 4). It is the number of people employed – not the number unemployed – that ultimately determines the amount of state income tax collected. Sales taxes are also related to disposable income. Higher employment creates a positive impact on per household, per capita, and disposable income levels.
U.S. economic conditions at press time were very uncertain and their volatility make it difficult for Congress and state and local government to assess future tax revenue expectations.
Likewise, business owners are unable to project and plan for the future demand for their companies’ products and services.