Friday, August 12, 2016
NOTES FROM THE SENATE, AUGUST 12, 2016
JULY REVENUES - A CRACK IN THE DIKE OR A BUMP IN THE ROAD?
Counting everything including new taxes and fees on fuel, revenues gained only 3.8%, one-third of the increase the state averaged over the last 12 months. Without the new funds added in, net revenues for the month increased only 1.7%, which was the headline for this month. Inside the Individual Income Tax numbers there is an extra $36 million in refunds that were held in fraud alert activities but finally had to be released. That $36 million, had it been paid out in June, would have made scant difference in the outstanding year the state reported, but made a lot of difference in one month... July is normally not a barn-burner any year.
So maybe this is just a bump in the road and everything will return to what has been normal for the last year or two...outstanding revenue growth at the top of the Southeast. Keep all of the above in mind as we review the numbers and see if you find the slivers of a continuing boom or the warning signs of a weakening economy.
Individual Income Taxes, half or so of the state's revenue, totaled $780.7 million for the month, down some $57.9 million or minus 6.9% from 2015. (So the figure would have been negative even without the $36 million in refunds that went out in July). Another somewhat disturbing sign is the Withholding payments, indicative of jobs and economic activity, down $16.7 million or minus 2%. Individual Income Tax Return payments were also down, $4.6 million or minus 37.7%. Hard to find any shiny slivers here.
And can anyone remember when the Corporate Income Tax was positive? It's down $15.8 million or 71.4% in July. In the past it has often taken a full quarter to show a positive number. I remind you, Corporate Income Taxes were negative for FY 2016, minus 1.9%, down $19 million.
FOR ONCE, SALES TAXES ARE HEALTHY
So maybe our good news comes from an unexpected source - Net Sales and Use Taxes increased 2.5% or $11.9 million for July, recording 30% of the total revenue for the month. Positive territory is quite an achievement since the $150-$180 million a year in Fuel Sales Tax was diverted from the treasury and, of course, new and used car sales are now charged a fee and not recorded as taxes. Sales Taxes totaled $484.0 million for the month.
Tobacco Taxes came in negative at minus 3.0% and Alcoholic Beverages were positive at 5.5%. Title Ad Valorem Taxes increased $15.6 million or 20.6%
NEW FUEL TAXES AND FEES CONSISTENT
As the orange cone replaces the peach as Georgia's symbol, the new taxes and fees fueling transportation projects are generating about the amounts expected. In July, Fuel Taxes increased $55.9 million, right in line with previous months. The Highway Impact Fees took in $26.1 million, a slight decrease over July of a year ago. Hotel Motel fees, not really reported in July of 2015 (reporting a month later), showed $14.8 million in July 2016. For the month, new fuel revenues totaled $71.9 million.
Sure, July of 2016 is a little muddy, compared to July of 2015 and the beginning of the new fuel tax structure, so maybe we just need to give everything another month or two to sort itself out. Even that little growth was enough to keep us ahead of budget or a little ahead by $3.6 million.
PEEPING AROUND THE CORNER
While you are not worrying about the numbers above, let me share some thoughts on disturbing events I have seen trending for the past 6 months or so. Now, I am not an economist, but I do seem to remember in the last recession, everyone was a lot more sure of events after they happened than they were in predicting the calamitous events that occurred.
So, here are some troubling signs I see that resemble the preceding period before the last recession...they may or may not manifest themselves in an economic downturn ahead:
We appear to be at full employment. There is starting to be competition for even menial jobs...watch the ads in your local paper...times are good when there are ads for entry level jobs...Restaurants on Hilton Head had to postpone opening because of labor shortage for those types of jobs. In state government, we are reaching the same point again where pay is a huge issue in many state jobs and we probably cannot keep up with the outside market for many skills.
Nationally 1.2%, economic growth was under 2% for the second quarter of this year...so far marking the slowest recovery since 1949, according to the Wall Street Journal.
Instability in China's economy is now more closely tied to the U.S. economy...marked by a flood of new investment in the U.S. by China...double what it was previously, and the big increase is in private investment, not the Chinese government. So the U.S. is apparently more closely tied to the ups and downs of China's currency, which was devalued this year. California's retirement system blamed a decrease of some size in assets on the devaluation.
Start watching the quarterly reports of sales by national retailers, manufacturers, companies like Apple, Dish TV and fast food franchises....many are reporting lower sales for the second quarter or predicting lower sales for the immediate future....Auto sales have already started to flatten out.
Farm prices are off again this year by as much as 40% and exports are suffering in some commodities. Some prices are 50% off the peak 2012 prices and this year will the 4th consecutive year of falling farm income. And have you ever seen so much farm equipment inventory?
There is a perfect storm brewing as it pertains to local and state retirement systems that has already started affecting budgets. Investment income is far below historic returns, people are living longer, there are fewer active employees to support retirement systems and a number of state and local governments have voted generous benefits without matching contributions over the years. Accounting changes will force even more investment by governments and some will just not be able to make those contributions. Kentucky lost its AAA bond rating this spring for not making enough required contributions to their retirement systems. The point is, you can't build your reserve, put aside health benefits funding for retirees, invest in education, expand medical care and protect the public on the same dollar coming in....something will have to give.
Whether these random thoughts result in a declining economy ahead, no one knows. This is for sure, though - we are not isolated from the rest of the world, from the rest of the country, from the rest of the state. What affects one of us affects us all.