Weaker corporate profits cost states millions
By Reid Wilson - 08/31/16 06:00 AM EDT
Declining corporate profits are causing states to lower their revenue estimates ahead of the new fiscal year, as federal forecasters predict American corporations will earn even less money next year.
States across the country lowered their original estimates of the corporate tax revenue they expect to generate this year by about 1 percent for fiscal year 2016, which ended in July.
The declining profits will hit some states especially hard, including those that depend most on revenue generated by the oil and gas sectors.
Alaska has revised its revenue forecast down 24 percent. Louisiana and North Dakota, two major energy-producing states, expect to generate about half the revenue from corporate profits they once anticipated.
“The exposure to the energy sector in some of these states has led to an important impact on overall revenues,” said Dan Seymour, an analyst at Moody’s Investors Services who examined the new data.
Of the 45 states that levy a tax on corporate incomes, Moody’s found 31 states expecting declining revenues ahead.
John Hicks, executive director of the NASBO, said lower corporate profits won’t necessarily blow a major hole in state budgets. States rely on corporate tax revenue for about 6 percent of their total general funds, while about three-quarters of those funds come from sales and personal income taxes.
But, Hicks warned, a number of states also posted lower personal income tax receipts than expected in the final few months of the year — numbers that reflect the influence that lower corporate profits can have on the broader economy.
“A lot of the reason” for the drop-off in personal income tax receipts, Hicks said, “was assigned to the 2015 performance of the stock market.”
At the federal level, the Congressional Budget Office estimates corporate income taxes will fall by $44 billion, or about 13 percent, in fiscal 2016, thanks to an omnibus appropriations measure passed in 2015 that made permanent tax deductions for certain investments.
Not every state that relies heavily on corporate income taxes will see a decline: New Hampshire, a state with no personal income tax, relies on corporate taxes for about 28 percent of its general fund revenue. The state expects to see corporate tax revenue grow by nearly 13 percent once final numbers from the 2016 fiscal year are in.
Rebounding energy prices are likely to help corporate tax revenues return to a growth trend, Seymour said.
Moody’s isn’t ready to call declining corporate profits an early indicator of an economic slump ahead, he said, because corporate profits don’t always correlate with broader economic indicators.
“There are periods where there is sort of a puzzling disconnect between the overall economy and corporate income tax,” Seymour said.
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