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This is the fourth annual report issued by the Comptroller
reviewing the economic and revenue forecasts for the State budget.
As in past years, this report focuses on whether the economic forecasts
are reasonable, and whether the revenue projections are consistent
with the economic forecast, recent collections history, and reasonable
expectations of taxpayer behavior. This analysis is not based on
an independent forecast for the economy or revenues; it reviews
the forecasts published by the Legislature and Executive based on
these criteria. This year's report also examines the changing composition
and character of personal income and the impact it has had on State
revenues.
Improving the Forecasting Process
The revenue forecasting process in New York remains flawed despite
a statutory requirement for a consensus economic and revenue report
to be released by March 10. Although the revenue estimate differences
are smaller than last year, no agreement has been reached and a
report has not even been issued.
The inability to reach a consensus on the revenue forecasts may
be based, in part, on the recent track record. Revenues and economic
performance have exceeded all expectations. Actual receipts exceeded
proposed Executive Budget estimates by more than $5.5 billion over
the past three years.
The Economy
The legislative and Executive forecasts for the national economy
have only small differences other than in their projections for
corporate profits.
For the state economy, the differences are more significant and
center on wage and employment growth.
Income and Revenue Trends
Tax revenues are increasingly difficult to estimate because of
the changing character and composition of personal income. Annual
growth in regular wage payments has disproportionately occurred
at the middle and upper end of the income distribution due to:
- Significant growth in bonuses paid by the financial sector to
their employees;
- Increased number and value of stock options exercised;
- Unusually strong capital gains due to record high stock prices
and unlocking of capital gains in response to lowered federal
tax rates; and
- Larger number of individuals investing in mutual funds that
make annual taxable distributions.
Analysis of Revenue Forecasts
Revenue estimates for 1997-98 and 1998-99 differ from Executive
estimates by between $476 million and $944 million. Although all
of the revenue forecasts are achievable there is considerable uncertainty
surrounding the components of income that drive the 1998-99 differences.
Disagreements on projected revenues for 1997-98 are minimal, ranging
from $100 million to $152 million. The major disagreements are in
the business taxes and estate and gift tax collections that the
State will receive in March.
The differences in expected revenues for 1998-99 are more significant
and range from $336 million to $819 million. At least half of the
disagreement is in the personal income tax, and how much will be
collected from the withholding and estimated payments tax.
- The fiscal staff's(1) forecasts vary by up to $323
million in higher wage withholding taxes. The different estimates
are a result of wage growth projections that range from 5.0 to
5.8 percent for the fiscal year. Because withholding tax rates
increase as income increases, the distribution of wage growth
among income classes is contributing to different estimates.
- The fiscal staff's forecasts vary by up to $305 million in higher
estimated income tax payment taxes on non-wage income. The difference
in projected capital gains explains over $200 million of the difference
in forecasts.
Risk
- From a revenue perspective, the changing character and composition
of income is good news, since the income tax is progressive and
proportionately more revenue is collected by the State when it
is received by higher income taxpayers. However, in terms of stability,
the foundation of the much higher tax revenues is the strength
in the financial markets. These markets have in the past been
volatile and the State's dependence on Wall Street significantly
increases the risk in the economic and revenue forecast
1. This report refers to the three forecasts published by the Legislative
fiscal committees as "fiscal staff forecast."
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