Fitch: US State Tax Revenue Sensitivities to Economy Vary

NEW YORK--()--Some states' fiscal 2016 tax collections missed their budgeted forecasts due to softness in the US economy, financial market uncertainty and continued lower energy prices, Fitch Ratings says. Whether state revenues will meet their forecasts in fiscal 2017 is uncertain. States that missed their revenue forecasts have managed shortfalls by using their strong budget flexibility, including lowering expenditures and drawing on reserves. However, managing an uncertain economic environment and the continuing slow pace of growth will continue to be challenges for states.

The National Association of State Budget Officers estimates that tax collections for fiscal 2016 (ended June 30) lagged the 4.8% revenue gain in fiscal 2015. Growth in the current fiscal year will likely to continue to lag historical norms.

We anticipated that some states could miss their revenue forecasts in second-half 2015. Although most state tax revenues have a strong relationship to overall economic performance, the Fitch Analytical Sensitivity Tool -- States & Locals (FAST) shows that some state revenues have much higher correlations to national GDP growth than most. According to FAST, between 2000 and 2014 New Jersey had the highest correlation to US GDP of all states at 0.91, while the median for all states was 0.70.

While FAST is not a forecasting tool, it does track the historical relationship between an issuer's revenues (adjusted for tax policy changes) and GDP. Fitch's forecast for US GDP in 2016 is 1.8% and 2.1% in 2017. At an average growth rate of 2%, FAST indicates that New Jersey's revenues would rise by approximately 2% over the previous year, assuming the relationship exhibited between 2000 and 2014 holds. California's revenues would rise by 4% and Connecticut's by 3%, given their greater sensitivity to the broader economy. This has also applied to the downside -- during economic downturns, these states' revenues shrank faster than both GDP and the average state. In 2009, GDP shrank by 2.8%, faster than it did in any other year between 2000 and 2014. During that year, the average state's revenue fell by 6.1% from the previous year. California's revenue fell by 14.1%.

We believe negative global market returns in mid-2015 lowered the wealthy states' income tax collections in the spring filing season. Massachusetts' income tax collections missed their forecasts in April by 6% and in May by 8%, while overall tax revenue growth for the year was positive. California also had overall tax revenue growth but, in April, personal income tax collections missed its forecast by 7%. The uncertainty in global financial markets seems likely to continue to keep the pressure on investment returns, and income tax collections in the wealthiest states, making budget management a challenge.

Oil prices are likely to only gradually recover and weigh down tax collections in the energy states into fiscal 2017. Fitch downgraded Alaska's Issuer Default Rating to 'AA+' from 'AAA' last month on the state's substantial operating deficits in recent fiscal years and the modest reform efforts taken to date to realign its stressed, petroleum-based revenue structure with expenditure demands. Approximately one-third of Alaska's gross state product is attributed to the drilling, production and economic multiplier effects of the oil and natural gas sectors. Other energy states have also been affected.

For more details on FAST's capabilities and its appropriate use and interpretation, click here: https://www.fitchratings.com/site/uspf/fast

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Contacts

Fitch Ratings
Rob Rowan
Senior Analyst
Fitch Wire
+1 212 908-9159
33 Whitehall Street
New York, NY
or
Laura Porter
Managing Director
US Public Finance
+1 212 908-0575
or
Media Relations
Elizabeth Fogerty
+1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Rob Rowan
Senior Analyst
Fitch Wire
+1 212 908-9159
33 Whitehall Street
New York, NY
or
Laura Porter
Managing Director
US Public Finance
+1 212 908-0575
or
Media Relations
Elizabeth Fogerty
+1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com