OBPP Presentation to the Revenue and Transportation Interim - - PDF document

OBPP Presentation to the Revenue and Transportation Interim Committee Nov. 17, 2016 The task at hand - What are reasonable expectations for total general fund revenue for next three years  Smaller individual estimate errors tend to cancel out  Variation tends to be in larger tax types  Our collective task is not to predict economic variables (i.e. GDP, unemployment, etc.), but to synthesize that information and formulate its incidence on GF revenue Comparing to trend revenue collections (%)  Average trend is a result of many years of “above trend growth” and a few instances of “below trend growth” Comparing to trend revenue collections ($)  Revenue growth is often greater or less than the trend growth rate, and these deviations self-correct

General Fund Revenue Trend Analysis

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $ Millions Fiscal Year Long-Term Trend General Fund Revenue

Year-to-Date Revenue Analysis  Following is a range of estimates based on a 16-year collection YTD extrapolation methodology  YTD extrapolation analysis improves as the year progresses, with the February extrapolation being the “Gold Standard” Wage Withholding as a Leading Indicator

Specific Considerations by Tax Type Individual Income Tax  Wages expected to continue rising  Weaker than expected revenues were in part absorption of retroactive federal tax changes (PATH Act)  Consumer led growth taking hold in a sustainable manner (due to wage growth locally and nationally)  Approaching full employment due to broad-based economic growth  Data may be underestimating base growth in the labor sector – but we want to wait and see Corporate Income Tax  PATH Act shifted bonus depreciation  Corporate profits dropped in CY 2016 but are expected to rise by 2017/2018 in all IHS Markit scenarios  Tax revenues will however lag due to the extension of tax advantages for corporations Vehicles  Continued growth is expected in new cohort registrations  The recession-induced drop in vehicle purchases leads mid cohort registrations lower  Total annual light vehicle registrations grow steadily as new vehicles exceed permanent registrations  Shocks to new vehicle purchases persist for many years, but the effect on revenue dampens over time Video Gambling  Employment and wage gains contribute to rising Montana disposable income  The percentage of disposable income spent on video gaming remains fairly constant Oil and Gas  Montana Bakken oil output is declining in the absence of new wells  The rate of decline in oil output will level off as wells age  Oil prices rise slowly as the market returns to balance

• OPEC output deal would provide lift to prices
• IEA projects continued growth in world oil demand

 WTI and Montana prices draw closer together as transportation constraints ease due to shrinking production  Natural gas production and prices remain steady due to ample domestic supply Interest Rates  The Federal Reserve is expected to continue to pursue monetary policy normalization  Rising employment, wages, and inflation allow the Fed to gradually increase the target range of the federal funds rate in the coming years.  Long term interest rates are expected to tick upward  Short-term investments owned by the State of Montana will see increased rates of return, while long-term investments will take longer to respond due to the ongoing existence of a stock of safe, relatively low-yield assets Coal Severance  Total coal production is projected to rise slowly over the next three years  Some export volumes are expected to come back online in the face of improving international coal prices  Declining coal stocks in the electric power sector will increase domestic shipments from Montana mines

Comparison of OBPP and LFD Estimates Looking Forward

Major New Data (MT, BEA, BLS, Federal Reserve) IHS State Data Release Potential Impact

• n Revenue

Estimate Date of Legislative Significance Date of Possible Full OBPP Revenue Estimate Update. (Assumes five work days)

December 6-Dec-16 17 Nov - Local Area Personal Income,2015 18 Nov - State Employment and Unemployment (October 2016) 26 Nov - US Personal Income & Outlays Oct 2016 29 Nov - US GDP Q3 2016 (2nd est.);

• Corp. Profits Q3 2016 (preliminary)

13-Dec-16 Minor Monday, December 15, 2016 Budget Adjustments Tuesday, December 20, 2016 January 30-Dec-16 13-14 Dec - Federal Reserve Meeting and Projections 7 Dec - State GDP, Q2 2016 7 Dec - County Employment and Wages QCEW Q2 2016 16 Dec - State Unemployment (November 2016) 20 Dec - State Quarterly Personal Income Q3:2016 22 Dec - US GDP Q3 2015 (third est.) Corp Profits (revised); 2 Jan - SABHRS December Collections (including CY 2016 Withholding) 6-Jan-17 Minor Jan 2 (Day 1) Jan 23 (Day 17) Last day for new Revenue Bills Wednesday, January 11, 2017 February 7-Feb-17 mid-Jan - DOR TY 16 Protested Property taxes 27 Jan - US GDP - 4th quarter and Annual 2016 (advance estimate) 31 Jan - Feb 1 Federal Reserve Meeting 1 Feb - SABHRS January Collections (including January Annual W/H update) 30 Feb - US Personal Income, December 2016 14-Feb-17 Major Feb 24 (Day 45) Transmittal of General Bills Tuesday, February 21, 2017 March 8-Mar-17 Feb 28 - US GDP, Q4 2016, & Annual 2016 (second estimate) 2 Mar - SABHRS February Collections; 9 Mar County Employment and Wages QCEW Q3 2016 2 Mar - CBO Projections\ 14-15 Mar - Federal Reserve & Projections 15-Mar-17 Minor March 19 (Day 60) Transmittal HJR 2; March 27 (Date 67) Transmittal of Revenue and Appropriation Bills Wednesday, March 22, 2017 April 7-Apr-17 3 Apr - SABHRS February Collections 17 Mar - CY 2016 State Employment Benchmark 17 Mar - January & February Montana Employment & Unemployment 28 Mar - State Annual & Quarterly Personal Income, Q4 2016; 30 Mar -US GDP Q4 & Annual 2016 (3rd Est.); Corporate Profits, Q4 and 2016). 3 Apr - SABHRS March Collections. 14-Apr-17 Major April 18 (Day 80), Transmittal of amended Revenue Bills (including HJR2) Monday April 25 90th Legislative Day Sine die (Monday, April 10 last da for Revenue bill hearing)

IHS National Data Release (2017 approximate) Major Montana - IHS Markit, Bureau of Economic Analysis, Bureau of Labor Statistics, & Federal Reserve Data Releases with their Potential Interaction with the Level of the Revenue Estimate and the Legislative Schedule

Estimate FY 2017 FY 2018 FY 2019 3 Yr. Total LFD $2,209.9 $2,330.2 $2,448.9 $6,989.0 OBPP $2,194.3 $2,301.4 $2,452.6 $6,948.3 Difference $15.5 $28.8

• $3.7

$40.6 Comparison of the General Fund Revenue Estimates by the LFD and OBPP for the 19 Biennium (Million $)