Council on Revenues: Rosy Growth Rate A Red Herring
Hawaii lawmakers and the governor have all called the Council on Revenue‘s latest economic forecast — 11 percent growth in tax revenues in budget year 2012 — overly optimistic. Indeed, it seems like an unrealistic increase given the economy hasn’t yet made a full recovery.
The recent disaster in Japan has even prompted the governor to ask the council to regroup and come out with a new forecast.
But the council chairman says the growth rate is a red herring: The number just isn’t as meaningful as people think. It’s artificially large because of former Gov. Linda Lingle’s decision to delay tax refunds last year.
The last time the state’s tax revenues saw growth near 11 percent was in budget year 2006. Year-over-year growth was 10.9 percent that year. Since then, revenue collections hit a low of minus 9.5 percent in fiscal 2009 and and a high of 4 percent growth in fiscal 2010.
In its March 15 forecast, the council increased its fiscal 2012 growth projection to 11 percent from 10 percent. It also lowered its forecast for the current budget year to just 0.5 percent growth from a previous 3 percent goal, which effectively lowered fiscal 2012’s starting balance. The two changes will mean total tax collections of $4.38 billion for fiscal 2011 and $4.86 billion for fiscal 2012. The council left its 2013-2017 projections of 6 percent annual growth unchanged.
Two of the council’s economists, including its chairman, point to a recovering economy as well as the lingering effects of the state’s decision to delay tax refunds last year for the seemingly upbeat forecast.
“Essentially, we still think the economy is going to recover — just when it happens has shifted,” said Carl Bonham, a council member and executive director of the University of Hawaii Economic Research Organization.
Bonham pointed to job growth late last year in the tourism, professional services and construction sectors as a strong indicator of the economy making a comeback.
“Job growth is necessary for people to keep spending, for the housing market to recover and for retail establishments and other businesses to make money again and pay taxes and in turn raise the economy,” he said.
Along those same lines, the national economy is expected to rebound this year as the Federal Reserve sees job markets improving.
In its most recent economic forecast, the Fed bumped up its prediction for economic growth, saying it sees a recovery standing on “firmer footing” with the improving labor markets.
The Fed is predicting GDP will grow between 3.4 percent and 3.9 percent for calendar year 2011, up from its November forecast of between 3 percent and 3.6 percent. It expects GDP will expand anywhere from 3.5 percent to 4.4 percent in 2012.
Back to Hawaii. Economist Paul Brewbaker, who chairs the Council on Revenues, said the 1-percentage point increase for next year isn’t “meaningful,” and is mostly tied to the effects of Lingle’s decision to delay income tax refunds last year — a move that threw the general fund out of whack.
Lingle used the tactic to help plug a hole in the state’s budget by shifting revenue growth into the 2010 fiscal year at the expense of the 2011 fiscal year. The state withheld payment of $275 million in anticipated state tax refunds until July 1, 2010. Brewbaker said the move artificially dragged revenue growth down in the current fiscal year (which started July 1, 2010), and will artificially boost growth next year.
“If you take out all the wobbliness, underneath it’s actually all 6 percent growth,” he said, referring to the 2011 and 2012 budget years. “The revision from 10 percent to 11 percent growth is not meaningful in an economic sense. It’s really an artifact of the refund timing change.”
He went on to explain: “The way the math works out, we made the adjustments to revise 2011 downward, which means the following year will kind of spring back a little more and makes 2012 look like it’s going to increase by a lot. But because last year’s refunds were delayed, as a consequence, the figures for this year are artificially reduced by that timing change and the figures for next year are artificially boosted. It’s going to have an impact on the estimated growth rates for each of next two fiscal years. Only after that time do things stabilize enough to get back to longer-term growth rates you see as 6 percent.”
