State revenue collections were slightly above target for combined July and August receipts, resulting in a modest surplus at the start of State Fiscal Year (SFY) 2027, which began July 1.

Neither July nor August is a critical month for State revenues, but the collections thus far during SFY 2027 offer reasons for optimism overall even as the growth among specific revenue sources was uneven.

The total amount of revenue collected for the State’s General and Education Trust Funds in July and August combined was $276.0 million on an unaudited cash basis. That total was $25.9 million (10.4%) higher than collections during the same period last year, and about $5.8 million (2.1%) above the amounts forecast in the State Revenue Plan.

While revenues were 2.1% higher overall for these two key State funds, several major revenue sources fell short of their targets in the first two months of the fiscal year.

Key Sources Falling Short: Business Profits and Liquor Sales

The combined revenue from the State’s two primary business taxes, the Business Profits Tax and the smaller Business Enterprise Tax, ran a small surplus of $2.1 million in August, but that did not fully offset the $8.5 million deficit in July, leaving revenues $6.4 million (11.7%) below planned amounts for SFY 2027 thus far. However, business tax revenues were $3.8 million (8.6%) above the same two months last year, suggesting overall growth, even if it is not keeping pace with the State Revenue Plan.

Profits transferred from the Liquor Commission were $5.7 million (39.9%) below expectations in these two months, and were also 17.3% below last year’s collections, continuing a long-term trend of lower net profits from alcohol sales. Revenues from video lottery terminals, a new State revenue source established within the last year, were $2.0 million (22.0%) short of planned amounts. Unlike last year, the rest of the Lottery and Gaming Commission’s surplus profits have not yet been enough to make up for underperforming video lottery terminals.

Real Estate Sales and Interest on State Cash Exceed Targets  

The entire revenue surplus of $5.8 million, as well as nearly half of all General and Education Trust Funds revenue growth from the prior year, is due to the Real Estate Transfer Tax bringing in more revenue than targeted. Real Estate Transfer Tax revenue continued to rebound from a slump following the COVID-19 pandemic as interest rates rose and new mortgages became more expensive.

While not as dramatic as the increase at the start of the pandemic, the steady increase in Real Estate Transfer Tax revenues has been driven in part by higher housing prices, particularly for single-family houses. The combined revenues collected in July and August, which are respectively based on June and July real estate transactions, were $8.1 million (16.7%) above planned amounts and $12.2 million (27.5%) above amounts from the prior year. In particular, the August revenues brought the Real Estate Transfer Tax’s twelve-month total collections to a new high of $242.9 million, unadjusted for inflation, which surpasses the $239.1 million twelve-month total reached in October of SFY 2023.

A few other revenue sources helped generate the small revenue surplus for the first two months of the year. Revenue from the Tobacco Tax, which is on a long-term decline as cigarette sales wane, was $3.5 million (11.0%) higher than expected and $1.6 million (4.7%) higher than last year during July and August.

Interest earned on State cash holdings, which has been a primary source of surplus in recent fiscal years, continues to perform better than expected as well. Interest revenue totaled $12.5 million in the first two months of SFY 2027, which was $5.6 million (82.2%) higher than the target, but was $2.4 million (16.3%) below last year’s earnings. This revenue source may be bolstered if interest rates increase, but will diminish if State cash holdings decline, which they have substantially in recent years as one-time federal aid associated with the COVID-19 pandemic has been used and State revenue surpluses have diminished.

See You in September

While July and August receipts are important for understanding economic activity that peaks in the summer, such as housing and restaurant meal purchases or hotel rentals, these two months do not provide significant insight into the State’s largest tax revenue source, which is the Business Profits Tax. Most businesses do not owe a quarterly estimate payment or an end-of-year return for the Business Profits Tax or Business Enterprise Tax in July or August.

As a result, July and August collections this year accounted for the equivalent of 8.6% of the total amount of revenue that is projected to be collected in SFY 2027. More revenue will likely arrive in September, when quarterly estimate payments are due from most businesses. That month will offer the strongest hints yet about whether this fiscal year will help bolster the State’s finances ahead of policymaker efforts to fund services in the SFY 2028-2029 State Budget.