State revenue expected to rise by $87M

AUGUSTA – Maine General Fund revenues are projected to grow by more than $87 million in the current budget year that ends June 30 and by about $181 million over the next two-year budget cycle, according to the state Revenue Forecasting Committee.

The additional money should help reduce, but won’t eliminate, a gap of about $570 million that had been forecast between expected revenues and projected expenses in the next two-year state budget. Gov. John Baldacci will have to account for that gap before he submits his budget proposal to the Legislature sometime before the statutory Jan. 5 deadline.

Most of the revenue growth forecast by the committee Tuesday is attributed to increased income taxes anticipated from about 25,000 of the wealthiest of Maine’s more than 650,000 taxpayers.

“As we get this IRS data on what the sources of income are that Maine residents are receiving, the last few years has shown most of it is going to the top end,” said Mike Allen, director of Economic Research at Maine Revenue Services. “I don’t have an exact number, but most of that growth in the personal income tax revenue is from that top group.”

Allen said for the past few years, while most Mainers have seen income increases that have barely have kept pace with inflation, Maine’s most wealthy taxpayers have seen growth three or four times the rate of most Mainers.

“Capital gains are up 8 or 9 percent; that’s significant growth,” he said. Capital gains taxes are paid on profits from the sale of such assets as stocks and bonds.

The Revenue Forecasting Committee increased the individual income tax estimates by $59 million and projected the corporate income tax will grow by an additional $31 million.

“Those corporate profits are also feeding back on to capital gains, dividend income and business profits that are flowing through to individual tax returns,” Allen said. “This is not unique to Maine; this is happening at the national level and in most states across the country.”

The growth in income taxes is carried forward into the two-year budget projections, fueling an upward reprojection of $181 million for the budget years of 2008 and 2009. Under the reprojection, total Maine General Fund revenue will top $3 billion for the first time this year, two years ahead of previous projections.

But several members of the panel raised concerns about the narrow base on which the growth is projected. In the late 1990s, capital gains were increasing by double-digit amounts every year. But in 2001, revenue from capital gains plummeted 55 percent after the stock market suffered the “dot com” crash.

“What worries me is that we are sort of at this peak now,” said Grant Pennoyer, director of the Legislature’s Office of Fiscal and Program Review. “We are assuming we are going to continue strong growth, a 10 percent growth this year.”

Allen shares the concern that at some point there will be a “stock market correction,” and growth will slow or could even stop.

“But I don’t know how we predict when that is going to happen,” he said. “We are reducing the growth projection in future years, but I can’t tell you when we will actually see it.”

University of Maine economist Jim Breece, who also serves on the committee, agreed it is impossible to accurately predict when capital gains tax revenues may decrease and by how much. He also shared the concern about the size of the expected increase in revenues this year.

“My knee-jerk reaction is to reduce that number from the 50s to the 30s, but we are really talking about only a 1 percent or so change,” Breece said.

The panel decided to stay with the projections for 2007, recognizing they will meet again in the spring to review the numbers.

Corporate income taxes were reprojected upward by $31 million as actual tax receipts continue to outpace estimates. The panel said Maine, like several other states, taxes corporations on the basis of their total profits. Energy firms were singled out as doing very well and contributing to the growth in income tax revenue.

But, not all of the reprojections were positive. For example, the state’s second-largest source of revenue, the sales tax, was reprojected down by $3.4 million, or about 3 percent, lower than first estimated for this budget year. Allen said there seems to be a strong correlation between energy prices and sales tax revenues.

“The sales tax has had trouble meeting estimates since last fall, but what we have seen in recent months is some bouncing back as energy prices came back down to some extent,” he said.

Allen said much of the sales tax depends on consumers having disposable income to spend on products. He said many Mainers were hard-pressed to pay for increased energy costs, and as a result they shopped less.