Maryland Revenue Outlook Fiscal Years 2005 2006

1
Maryland Revenue Outlook Fiscal Years 2005 - 2006

• David F. Roose
• Director, Bureau of Revenue Estimates
• October 22, 2004

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Maryland Revenue Outlook

• Fiscal year 2004 closeout
• Current thinking on FY 2005 and 2006
• Impact of federal tax changes
• Budget outlook

3
Fiscal Year 2004 CloseoutGeneral Fund, in
millions
4
FY 2004 Individual Income Tax

• Withholding grew by 6.6
• Met expectations
• Baseline growth was about 5.0
• Estimated payments grew by 8.4
• Expectations were 5.4 growth
• Acceleration every quarter, from very slight
  decline in 2003Q3 to growth of 21.4 in 2004Q2
• Settlements were much better than expected
• Refunds below estimates, final payments ahead
• Taxpayers had better 2003 than they (and we)
  thought

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FY 2004 Individual Income Tax (cont)

• Baseline growth was approximately 4.8
• FY 2004 changes included
• Flat withholding for State income tax
• Withholding of real estate sales of nonresidents
• Increase in safe harbor for estimated payments
• Variety of compliance measures from 2003 Budget
  Reconciliation Act
• Large increases in local income tax rates for tax
  year 2004 (affected components but not GF)
• General fund growth of 7.95

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FY 2004 Corporate Income Tax

• Showed strong growth (14.0) as eight consecutive
  quarters of double-digit increases in profits
  appeared on tax returns
• Comptrollers settlement of Delaware Holding
  Company (DHC) issue brought in 14.8 million (not
  included in previous table)
• 11.2 million general fund
• Much of that will be refunded due to legislative
  settlement (though net will be positive)
• Distribution of settlement revenue will follow
  normal corporate income tax revenue distribution

7
FY 2004 Sales Tax

• Growth of 8.3, following 0.6 and 2.1 in fiscal
  years 2002 and 2003
• Consumer component grew by strong 7.3, supported
  by tax cuts
• Construction component grew 15.9
• Reconstruction after Hurricane Isabel
• Strong housing market
• Sharp increase in prices for building materials
• Utilities and capital goods weaker, but only
  16.7 of gross collections

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FY 2004 Other Revenues

• All revenues but interest exceeded estimates
• Lottery was substantially over, as sales growth
  rebounded from 1.3 in 2003 to 5.5
• Franchise taxes made estimate despite concerns
  over large increase in filing fees
• Premium taxes continued very strong growth
• Estate taxes grew very strongly in 2nd half
• Miscellaneous revenue growth due to abandoned
  property and law changes

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Preliminary Forecast for FY 05 and 06

• Unofficial estimates reflect staffs current
  thinking
• Official estimates will be released by the Board
  of Revenue Estimates in December
• September estimates based on
• Fiscal year 2004 results
• Changes in economic outlook
• Statutory/regulatory/administrative changes
• December estimates reevaluate above, along with
  year-to-date performance

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Maryland Economic Forecast(CY 2003 2006)
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Fiscal Year 2005 Forecast(GF, in millions)
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Fiscal Year 2006 Forecast(GF, in millions)
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Individual Income Tax Rebounds

• Baseline growth of 6.9 in fiscal year 2005 7.0
  in 2006
• Withholding grows at 7.7 and 6.1
• Baseline growth of 6.1 and 6.2
• FY 05 changes include full year of both flat
  withholding and local rate increases
• Uncertainty over withholding performance through
  latter half of FY 04 and all of FY 05 due to
  change in due dates
• Estimated payments grow at 7.3 and 8.0

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Employment Growth Supports Withholding
15
Estimated Payments Resume Growth
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Corporate Income Tax Grows Rapidly

• Profits forecasts call for near 10 growth in FY
  05
• Delaware Holding Companies
• Settlement has raised 86.2 million (65.5
  million general fund) through October 15
• Another 15.6 million in the door, not yet
  approved two weeks to go
• Closing loophole adds 20 millionor much
  moreannually
• Changes in upcoming session?
• Growth of 18.2 in FY 05 and 11.7 in FY 06
  (excluding settlement)

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Other Revenues

• Stronger growth expected from sales tax, off of
  higher base
• Lottery will lose some ground with new game
  planned for FY 2005 called off
• Death taxes rebound sharply
• FY 2005 off to very strong start
• Decoupling from federal changes adds millions
• Excise taxes decline slightly due to tobacco
• Court revenue slows with recordation activity

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Retail Sales Bounce Back
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FY 2005/2006 Bottom Line

• FY 2005 revenue growth of 5.2
• Holding company settlement will far exceed
  expectations loophole closure may not
• Estate tax revenues will be revised upwards
• FY 2006 revenue growth of 5.4
• Income tax forecast likely to come down in
  December
• Compares to 9.9 growth in FY 04
• Highest since 1987 (11.5)
• Follows declines of 4.6 and 0.4

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Recent Federal Tax Changes

• Economic Growth and Tax Relief Reconciliation Act
  of 2001 (June 7, 2001)
• Job Creation and Worker Assistance Act of 2002
  (March 9, 2002)
• Jobs and Growth Tax Relief Reconciliation Act of
  2003 (May 28, 2003)
• Working Families Tax Relief Act of 2004 (October
  4, 2004)
• American Jobs Creation Act of 2004 (yet to be
  signed)

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Decoupling from Federal Changes

• Reconciliation bills of 2002 and 2003 (SB 323 and
  508) have decoupled Maryland taxes from many
  recent federal changes
• Repeal of the estate tax and increase in credit
• Qualified higher education expenses deduction
• Depreciation and NOL provisions
• Maryland is also automatically decoupled, for one
  tax year only, from any change resulting in a 5
  million or more revenue impact in the first
  fiscal year

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2001 EGTRRA Most Substantial Impact

• No MD revenue loss from phased-in reduction of
• Federal tax rates
• Creation of 10 bracket
• Doubling of child tax credit
• Marriage penalty relief
• 35 - 40 million loss (FY 03 - 06) from
• Deductions for higher education expenses
• Higher IRA contribution limits
• Increases in federal EITC
• Repeal of State estate tax would have cost 25 -
  100 million or more

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2002 JCWAA had Two Business Provisions

• Bonus depreciation of 30 of the cost of
  eligible property (that acquired between 9/11/01
  and 9/11/04)
• Extended carryback for NOLs incurred in tax years
  2001 and 2002 (5 years instead of 2)
• These two provisions do not materially affect tax
  liability over time, but they shifted realization
  into the future
• Nonetheless, the Maryland income tax was
  explicitly decoupled from these provisions to
  save over 100 million in first two years

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2003 JGTRRA Related to Previous Cuts

• Full impact of federal rate reductions, larger
  10 bracket, and child tax credit became
  effective for TY 03 rather than 06, 08 10
• No direct effect on Maryland revenues
• The bill also provided two new business cuts
• Increased (to 50) and extended (to December 31,
  2004) bonus depreciation provisions
• Increased depreciation for small businesses
• Automatic decoupling became effective for latter
  provision

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2004 Bills Yet to be Thoroughly Analyzed

• WFTRA generally extends until 2010 provisions of
  2001 tax cut accelerated by 2003 tax cut but
  which sunset before 2010
• No provision anticipated to require decoupling
• AJCA has 250 changes to business taxes
• May have to decouple from corporate income tax
  changes
• One major indirect effect of this series of
  federal tax cuts is an increase in disposable
  income and therefore taxable sales

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Budget Outlook

• General Assemblys Spending Affordability
  Committee met Tuesday
• Prior projections were for deficits of
• 419 million in FY 2006
• 1,205 million in FY 2007
• 1,686 million in FY 2008
• Take rough account of preliminary estimates
• As before, Thornton and entitlements cause
  spending growth

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Maryland Revenue Outlook

• Questions?