State’s Top Fiscal Advisors Recommend Revenue Estimating Change

The Department of Legislative Services (DLS), Department of Budget and Management (DBM), and Comptroller’s Office testified before the Spending Affordability Committee today in agreement on one point: that the State should start limiting the amount of capital gains tax revenues it includes in its revenue estimates.

Warren Deschenaux, executive director of DLS and the legislature’s senior budget analyst; David Brinkley, secretary of DBM; and Andrew Schaufele, director of the Bureau of Revenue Estimates within the Office of the Comptroller authored a report recommending that the State apply a cap to the estimate of nonwithholding revenues assumed in the budget process. The recommendation comes after the Bureau of Revenue Estimates significantly reduced its revenue estimates in September, and at the last Spending Affordability Committee briefing, Deschenaux emphasized that income tax revenues – the General Fund’s largest revenue source – are generated more and more from unearned income such as capital gains, making revenues harder to estimate and generally more volatile.

They recommended:

  • The cap should reflect the average share of nonwithholding revenues to total general fund revenues over the most recent 10-year period (i.e., if nonwithholding revenues represent 15% of total general fund revenues over the last decade, then the revenue estimate for next year for nonwithholding is capped at 15% of general fund revenues)
  • Estimated nonwithholding amounts in excess of cap should not be appropriated
  • Revenues captured by the cap at closeout should be utilized to increase Rainy Day Fund balance to 10% of general fund revenues (currently at about 6%), avoid debt by supporting pay-as-you-go projects, and address unfunded retiree health and workers’ compensation liabilities

A briefing on the findings and recommendations is available here. 

Capital gains makes up about 20 percent of the state’s net taxes but the vast majority of that comes from just 5 percent of the more than 2.6 million taxpayers, reports The Daily Record. 

At the last Spending Affordability Committee briefing, when asked whether the General Assembly had a “spending problem,” Deschenaux responded, “this is an economy problem.” This time, he referenced that previous question again and clarified that this was not a “spending problem,” but a “revenue problem.”