KY Policy Blog

Revenue Forecast for Next Budget Remains Weak

By Anna Baumann
October 11, 2013

Today the official group charged with forecasting state revenue again approved a very modest General Fund revenue estimate for the upcoming two-year budget. Compared to the draft forecast they chose in August, the new estimate assumes $59.5 million more revenue in 2014 and $29.6 more in 2015, but $23.9 less in 2016.

Higher than expected growth in the sales and corporate income tax in the last couple of months contributed to the slight improvement in expected revenue this fiscal year and next year. Recovery in the housing market and high corporate profits are factors likely causing this growth. But the tone of today’s conversation was far from optimistic—general uncertainty about the economy and the coal severance tax in particular led the group to express caution. Today’s estimates are preliminary, and the Consensus Forecasting Group will meet again in December to come up with final estimates lawmakers will use in crafting the new budget.

The weak forecast means that the serious gap remains between the resources the state will have and the basic costs it will face in the next budget. In fiscal year 2015, the state will need more than $400 million in new dollars to make the full payment toward its pension liability, replace one-time funds used to balance the current budget and cover inflation in health care prices. Plus it will need substantially more revenue to address new needs and begin restoring some of the $1.6 billion in cuts that have been made to education, health and other essential public services over the past seven years.

But today’s forecast predicts just $229.5 million in new revenue in 2015, growth of 2.4 percent. It projects $221 million more in 2016, growth of 2.3 percent.

Continued slow recovery from the Great Recession and federal budget cuts enacted under the Budget Control Act of 2011 (including sequestration) are setting back economic growth and thus constraining revenue.

But a slow-growing economy is not the only reason revenue will be short in the coming biennium. Due to structural problems with Kentucky’s tax system, the state’s General Fund is continuing to erode as a share of the economy. That means even in good economic times, revenue is not keeping up with the cost of sustaining current investments in schools, roads, police and the other public services that we all depend on.

Without good tax reform that brings in more revenue, the state will have to cut even more deeply the investments that grow our economy and improve our quality of life. The Blue Ribbon Commission recommended a set of reforms that, taken as a whole, would generate $659 million in new revenue a year and make future revenue growth more sustainable. But the legislature is yet to make a commitment of whether or how it will consider such ideas in the upcoming legislative session.

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