In late October, revenue collections for the State of Utah were released for the 1st quarter of fiscal year 2023. The state government operates on a fiscal year that runs from July 1st to June 30th, so the 1st quarter of fiscal year 2023 comprises the months of July, August and September of 2022 (the fiscal year runs a half year ahead of the calendar year).
Revenues continue to come in significantly stronger than what has been previously forecasted. Forecasts for the upcoming budget surplus will need to be revamped. The Utah Taxpayers Association has previously written about a projected $1.4 billion surplus and explained that there should be plenty of room to provide meaningful relief to taxpayers by lowering the income tax rate to 4.5% and still provide healthy funding increases to education and other needs. However, with the latest numbers for the first three months of the new fiscal year, there will be even more surplus available.
The new TC-23 from the State Tax Commission for the 1st quarter of fiscal year 2023 shows another surprisingly strong batch of tax collections. This will result in projections for the upcoming fiscal years being changed.
It is clear to see from the report that from July through September, revenue to the General and Income Tax Funds was over $2.5 billion, which is a year-over-year increase of 11.1%, compared to the target rate of -4.1%. The General Fund (sales tax) collections were up 16.4% year-over-year compared to the target of -4.7%. Income Tax Fund collections reached over $1.5 billion so far, with an increase year-over-year of 9.8%, compared to the target rate of -3.7%.
Consequently, based on the current trajectory and conservative assumptions going forward, the Utah Taxpayers Association believes that when lawmakers start planning for the next fiscal year (2024), they could be looking at ongoing available revenue of over $3.0 billion and a one-time surplus of more than $3.4 billion.
If this proves to be correct, legislators will have even more room for a cut to 4.5% on the income tax rate than before, even after factoring healthy increases to education spending and other priorities.
If you asked 100 economists if they are predicting a recession in the near future, at least 99.5 of them would say yes. Everyone on the planet is predicting one is on the horizon or has already started. History has shown that if 100% of folks are predicting something, it often pays to bet on the opposite happening. The US economy and the Utah economy could possibly avoid a recession, or experience a mild one with a soft landing, or anything in between. Essentially, nobody knows.
However, for now, let’s factor into our projections a recession and recalculate our math.
First, we change our forecasts to include of a decline in individual income tax revenue for Utah for the remainder of this fiscal year (2023) of -3% and -5% in FY 2024, a decline in corporate income tax revenue of -30% for FY 2023 and -35% for FY 2024, and a combined General Fund and Income Tax Fund decline of -3% in FY 2023 and -5.2% in FY 2024. Under this plausible recession scenario the State of Utah is still left with ongoing available revenue of $1.2 billion and a one-time surplus of over $2.7 billion for the upcoming fiscal year 2024. This still leaves Utah with plenty of ability to provide a cut to 4.5% and give substantial increases to spending in critical areas.
The Utah Taxpayers Association is looking forward to reviewing these estimates with elected officials as we lead up to the 2023 Legislative Session in January.