State Revenues Exceed Expectations, But Economic Uncertainty Looms

General Fund revenues in fiscal 2020 totaled $18.634 billion, an increase of 2.4% ($435.1 million) over FY 2019, and 0.5% ($102.2 million) below the March estimate. Personal and corporate income tax revenue exceeded expectations, while sales and use tax revenue came in lower than expected.

Maryland Comptroller Peter Franchot today announced that as the State closes out fiscal 2020, General Fund revenues totaled $18.634 billion, an increase of 2.4% ($435.1 million) over FY 2019, and 0.5% ($102.2) million, below the Board of Revenues Estimates (BRE) projection from March. The State will close out fiscal 2020 with an unassigned General Fund balance of $585.8 million, or less than 1.2 percent of the total fiscal 2020 operating budget of $47.27 billion.

Given the lack of information and uncertainty of the impact of the COVID-19 pandemic, the BRE — a three-member panel which includes Comptroller Peter Franchot, State Treasurer Nancy Kopp, and Secretary of Budget and Management David Brinkley and is responsible for estimating state revenues to assist with managing the State’s budget — in March adopted a forecast that explicitly did not consider the economic impact of the novel coronavirus.

As previously reported on Conduit Street, the BRE in May updated its projections in an attempt to incorporate expectations of the pandemic and proved to be too conservative. The upper bound of the range provided in fiscal 2020 was $924.8 million below the official estimate.

Personal Income Tax

The State collected $10.699 billion through the personal income tax in fiscal 2020, 1.1% above the estimate. This corresponds to 4.2% growth from fiscal 2019.

While personal income tax withholding — which accounts for 45 percent of the entire general fund — growth slowed due to job losses amid the COVID-19 pandemic, it remained strong, finishing at 5.8% above fiscal 2019. Much of the positive variance from the March estimate in non-withholding income tax can be attributed to income earned in 2019, which was unaffected by the COVID-19 pandemic.

Personal income tax revenue matters for counties, which levy a local personal income tax.

Corporate Income Tax

The State collected $1.052 billion in General Fund revenue through the corporate income tax in fiscal 2020, 4.0% higher than the March estimate. This corresponds to 1.8% growth from fiscal 2019.

Following significant growth of 25.9% in fiscal 2019, due primarily to tax shifting incentives of the federal Tax Cuts and Jobs Act, growth was expected to slow considerably. Even so, corporate income tax revenue exceeded expectations.

The corporate income tax is virtually all state revenue, with only a small sliver being shared through the Highway User Revenues distribution. There is no major direct sharing of corporate taxes, nor any counterpart county-level taxation of corporate profits.

Sales and Use Tax

The State collected $4.635 billion in sales and use taxes in fiscal 2020, 6.4% below the March estimate. This corresponds to a decline in revenue of 3.7% from fiscal 2019.

The sales and use tax is a tax on certain types of consumption. Maryland’s sales and use tax is 6 percent. State sales taxes apply to purchases made in Maryland while the use tax refers to the tax on goods purchased out of state.

Goods considered to be necessities — like groceries and medicine — are exempt from the sales and use tax, with the intended purpose of reducing the regressive nature of flat consumption taxes. In reaction to the COVID-19 pandemic and efforts to contain it, consumers delayed, forwent, and shifted their consumption spending toward remote or online sellers.

The sales and use tax is levied by the State. There is no direct sharing of sales and use taxes, nor any counterpart county-level tax on consumer goods.

Franchot Calls for Stimulus and Rescue Package for Maryland Small Businesses

Comptroller Franchot is urging Governor Larry Hogan and the General Assembly to allocate the entirety of the $585.8 million General Fund balance to fund a stimulus and rescue program for Maryland small businesses.

According to a statement from Comptroller Franchot:

These closeout figures for Fiscal Year 2020 underscore Maryland’s fundamental economic strength. Our state is home to world-class institutions and federal agencies, the most educated workforce in the nation, and some of the finest public universities and colleges. While this higher-than-expected General Fund balance is a positive development, we must not lose sight of the tremendous damage the COVID-19 pandemic has caused to the financial security and livelihoods of millions of Marylanders and small businesses throughout our state.

More than 1.1 million Marylanders have filed for unemployment since March, and all segments of our economy have been forced to lay off workers and have seen plummeting revenues. The measures that state and local governments put in place were necessary to safeguard public health and safety, but the economic and fiscal challenges before us require leaders at all levels of government to address these monumental problems.

The Governor and the General Assembly will have to come together, in a bipartisan manner, to solve the fiscal crisis that we are experiencing. In July, the Board of Public Works reduced Fiscal Year 2021 spending by $413.17 million, and more budget cuts could be necessary should the federal government fail to provide aid to state and local governments. With a revenue shortfall that could be up to $4 billion in Fiscal Year 2022, tough and painful decisions will have to be made to fulfill our constitutional mandate to balance our budgets.

At the core of Maryland’s economic strength is our small businesses, whose contributions to our state extend beyond the billions of dollars in revenue they generate and the jobs that they create, but also the immeasurable impact they have within our communities. That’s why since March, I have publicly urged the Governor to allocate $500 million in aid to locally-owned businesses that are struggling to stay afloat.

With a General Fund balance of $585.8 million and a Rainy Day Fund balance of approximately $1.2 billion, I strongly urge the Governor and the General Assembly to allocate the entirety of the $585.8 million General Fund balance for an urgently-needed stimulus and rescue program for Maryland small businesses. These small businesses will simply not survive this economic devastation in the absence of state support – and Maryland would be in danger of losing thousands of jobs, direct and indirect economic benefits, and community investments that they generate.

Detailed information can be found in the full fiscal 2020 closeout report and the Bureau of Revenue Estimates closeout memo.

Stay tuned to Conduit Street for more information.

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