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Economic Currents

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Q & A: Generous Tax Credit Leads to Lower Revenue Forecast

Posted September 7, 2012 | Categories: Q&A
1. The State Council on Revenues met yesterday and lowered its projection for general fund tax revenues. Whats up with that? I thought the tourism boom was also generating tax revenue growth.

It is true that the boom in tourism spending and arrivals have contributed to a surge in tax revenues. Transient accommodations tax revenue grew by almost 30% in 2011 and is up 10% though July of 2012. And General Excise tax revenue is up 8% though July.

2. So why is the council lowering its forecast?

The Council actually raised its economic forecast a bit. But overall, we lowered the tax revenues forecast because of new estimates of the tax credits claimed for solar photovoltaic installations. Those estimates show a more than doubling of tax credits in the past two years, increasing to $170M in the current FY. And the Council adopted an estimate for next FY of $230 M in credits.

3. OK, what about the US jobs report?

The employment situation in August was not good. The US economy created 96,000 jobs in August, well below the consensus forecast of 125,000. So far this year, the economy has added 1.21 million private sector jobs and at this rate would add fewer than the 1.8 million private sector jobs created in all of 2011. As has a been the case for the past 2 years, the government sector shed workers despite growth in private sector jobs. State and Local government jobs have declined by 61,000 since the start of the year, and federal government jobs have fallen by 32,000.

4. So will job growth like this get President Obama reelected?

The slowdown in economic growth this year sure is working against him. Check out UHERO's blog post—It's the Economy, Stupid! (Or Is It?) One question is whether voters understand and agree with former President Clinton's point that President Obama inherited an economy that was in such horrendous shape, that it was impossible to repair all the damage in 4 years time. No President could have accomplished that.

5. Is there anything policymakers can do to increase economic growth?

Yes, and the odds of Federal Reserve action when they meet next week have definitely increased with this jobs report. Ben Bernanke set the stage for additional FED easing in his speech last week at Jackson Hole where he argued that QE has been effective and the potential costs of nontraditional monetary policy are manageable. And we have already seen some significant policy action this week on the part of the European Central Bank. The E.C.B. president, Mario Draghi announced that the bank will purchase sovereign bonds in unlimited quantities on secondary markets to support euro zone countries that have requested assistance and agreed to conditions set by the European Stability Mechanism. This was a pretty significant step in helping to calm bond markets and reduce the borrowing costs of Spain and Italy. 

---Carl Bonham








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