The Consensus Forecasting Group (CFG), a group established by statute to help estimate state revenues, revised estimates for incoming state revenues for fiscal years (FY) 2023 and 2024. The revisions follow several months of stronger than expected state tax receipts and the conclusion of fiscal year 2022, which ended in June 2022 with revenues exceeding estimates by nearly $1 billion.
CFG revised total estimated revenues for FY23 from $14 billion, originally estimated in December 2021, to $15.2 billion. FY24, which begins in July 2023, was revised from $14.6 billion to $15.4 billion. Presented with three scenarios for growth – control, optimistic, and pessimistic – CFG selected the “optimistic” scenario.
State revenue estimates are based on economic and fiscal factors and are forecasted with the assistance of data-gathering and econometric models coordinated by the Office of the State Budget Director (OSBD) and staff from the Legislative Research Commission. Based on receipts already received during the current fiscal year, state officials are anticipating that revenues will exceed appropriations by more than $1 billion in FY23. An economist with OSBD delivered a presentation at the meeting highlighting the possibility of a brief and mild recession in 2023 but also gave probabilities on both continued economic growth and a longer recessionary period in 2023 and 2024.
“The revised revenue estimates tell a story of an economy that continues to grow, but slower growth is clearly on the horizon as economists expect the economy to cool or even contract,” said Kentucky Chamber Center for Policy and Research Executive Director Charles Aull. “Given the scale of the economic and revenue growth the state has seen in recent years, some sort of slowdown should certainly be expected. Policymakers have a lot of information and data to digest as they make decisions in the near future on how to continue strategically investing taxpayer dollars while also carefully reforming the state’s tax code to improve Kentucky’s economic competitiveness.”
State sales and use taxes are anticipated to be the key revenue driver for growth in 2023 and 2024, while total revenues from individual income taxes are set to decline. In the 2022 legislative session, lawmakers passed House Bill 8, which will slowly and carefully phase down individual income tax rates. An initial rate reduction – from 5 percent to 4.5 percent – will occur automatically on January 1, 2023, the midway point of FY23. This is based on the state meeting specific revenue and savings goals provided for in House Bill 8 in FY21. Conditions in FY22 will allow for an additional reduction in 2024, but lawmakers will have to vote to approve the reduction during the 2023 legislative session. The new revised revenue estimates account for the 0.5 percentage point individual income tax rate reduction scheduled for January 2023 but not the potential follow-up reduction in January 2024. In addition, the revised estimates and economic forecast do not consider the impacts of announced investments in the state, such as the incoming Ford battery plan in Hardin County.
Under the revised forecast, sales and use tax revenues are anticipated to grow 12 percent in FY23 and 6.5 percent in FY24. Sales and use tax revenues are projected to surpass individual income tax revenues in FY24, making the former the state’s largest revenue generator that year.
Revenues from corporate taxes have surged in recent years, growing 38 percent in FY21 and 34 percent in FY22. This is the result of strong corporate earnings but also reforms to the state’s corporate tax code during the 2018 and 2019 legislative sessions. Revenues from this source are projected to grow 7.8 percent in FY23 and 1.5 percent in FY24.
Certain revenue categories – such as cigarette and coal severance taxes – are expected to decrease in future years.
State law allows the Legislative Research Commission or the State Budget Director to request revised estimates from CFG. Based on revenue growth in FY22 and so far in FY23, the State Budget Director requested the revised estimates. CFG is expected to meet again to study revenue forecast next summer.