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    Tuesday, June 18, 2024

    Why good fiscal forecasts matter

    April this year brought a nice surprise for federal and state tax collectors. Uncle Sam enjoyed unexpectedly robust net income tax receipts of $483 billion, amounting to a $103 billion, or 27%, increase over April 2023, according to the Congressional Budget Office. Uncle Sam can use the revenue, but even a $100 billion surprise will hardly make a dent in ongoing massive federal deficits.

    The increase was driven by a $77 billion, or 26%, increase in final payment of non-withheld income taxes, namely net taxes paid in estimated installments throughout the year. A large portion of non-withheld taxes are taxes on capital gains.

    Connecticut enjoyed the same unexpected serendipity. Net non-withheld individual income taxes in April hit $1.7 billion, a $275 million, or 19%, gain over April 2023.

    But why were federal and state tax collectors so surprised?

    April usually accounts for about 15% to 20% of total annual individual income tax receipts, nationally and in Connecticut, and non-withheld income taxes usually account for two-thirds to three-quarters of the April total. Shouldn’t budget officials have a better fix on such an important revenue month and such a critical category of taxes?

    They would, if they recognized that capital gains taxes have a major impact every April and that capital gains tax revenue rises and falls in relation to the performance of the stock market in the prior calendar year.

    Yet, the CBO does not even forecast non-withheld income taxes. It should, given their volatility and importance in April each year.

    Connecticut budget agencies track year-to-date tax collections compared to the prior comparable period. That comparison is useless. In the federal fiscal year through March 31, federal non-withheld income taxes were up only $60 billion from last fiscal year’s six-month total of $1.03 trillion.

    In Connecticut, non-withheld receipts for the first nine months of its fiscal year fell below the prior fiscal year’s first nine months. So, Connecticut budget agencies lowered their projection for the full fiscal year. Now, with April receipts in hand, they find that they have missed by $645 million. That’s a big miss with just two months left in the fiscal year.

    Yet, there would be no big surprises or misses if budget officials simply looked at stock market performance in the prior calendar year. In 2023, the S&P index rose a stunning 26%, the very same percentage that federal non-withheld income taxes in April rose over the prior April.

    The stock market is a good predictor on the downside as well. In fiscal year 2023, federal non-withheld income tax receipts dropped $189 billion, or about 24%, from the prior April. Why? The S&P index plunged about 20% in 2022. A parallel revenue plunge in Connecticut took receipts a half-billion dollars below forecast.

    Good forecasts matter. They help to keep spending in line with revenue.

    Yet, once this April’s robust receipts arrived, not only did Connecticut budget officials add $645 million to their current year estimate, but they added $1.5 billion over the next three years. This after removing $1.5 billion from their long-term forecast last year after their big overestimate. Flip-flopping is not helpful. Moreover, this time around, they have added an extra year – a fourth year – and even more money to their long-term forecast.

    Within days, state Democrats awarded hundreds of millions of American Rescue Plan money to UConn and other public universities — after already having awarded them $415 million over the prior two years. ARP money is supposed to go for temporary or one-time expenses. Clearly, it has gone to fund permanent budget increases.

    The new-found money in the revised long-term forecast will encourage more of the same. Yet, the money in the new forecast may actually be designed to cover future deficits that are already baked in. The Connecticut Mirror reports that the budget in fiscal year 2025-2026 is already $1 billion in the hole.

    At the federal level, ongoing enormous budget deficits have become commonplace, driving the national debt to a stratospheric level. Yet no one cares, because the increasing debt has little immediate impact.

    Interest on the debt, however, does. Already, net interest has increased a whopping 42%, from $374 billion last year to $531 billion, more than defense spending so far this year. It is headed toward $1 trillion for the fiscal year.

    The irony is that this April’s big tax revenue surprises for Uncle Sam and the Nutmeg State should matter, but they don’t. Uncle Sam’s $100 billion surprise will cover only about one-tenth of net interest expense for the fiscal year. Connecticut’s $275 million surprise plus the extra $1.5 billion in the state’s long-term forecast will barely cover almost inevitable future deficits. But don’t worry, the national economy is barreling along and nothing can go wrong.

    The original version of this column appeared on Real Clear Politics.

    Red Jahncke is the founder and CEO of Connecticut-based The Townsend Group International, LLC. He is a nationally recognized columnist who writes about politics and policy.

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