State revenues collected in September were below the State’s target amounts for the month, giving the first clear indication of the new fiscal year that declining business tax revenues are not yet turning the corner back to growth.
Behind in the First Quarter
In aggregate, September revenues flowing to the General Fund and the Education Trust Fund combined were $7.0 million (2.2 percent) below the target set by the State Revenue Plan, which is designed to match planned State Budget spending and revenue forecasts. Revenues were below last September’s collections by $15.7 million (4.8 percent), unadjusted for inflation.
September’s collections are key for overall revenues. About 90 percent of businesses have a tax year coinciding with the calendar year, and these businesses were required to pay their third quarterly estimate payments in September. As a result, about 10.3 percent of the total State Revenue Plan’s forecast of nearly $3.1 billion for State Fiscal Year (SFY) 2026 was expected to be collected in September.
For the first three months of SFY 2026, total General and Education Trust Funds revenue is $17.2 million (3.0 percent) below planned amounts. If the rest of the year’s revenues came in at the target amounts, the shortfall would be about 0.6 percent. However, if these first three months of revenues are a signal of shortfalls to come, then the gap could widen; a 3.0 percent revenue deficit for the year, should the shortfall continue at this relative pace, would total about $93.0 million.
Compared to last year’s collections, the first three months of SFY 2026 were $37.1 million (6.2 percent) below the same period in SFY 2025.
Business Taxes Lag Behind
The primary reason for the shortfall in revenue compared to the State Revenue Plan is receipts from the two business taxes. The combined revenues from the Business Profits Tax and the Business Enterprise Tax were $16.0 million (8.4 percent) below the expectations of the State Revenue Plan in the first quarter of SFY 2026, and $25.5 million (10.4 percent) below the receipts from the first quarter of SFY 2025.
Other revenue sources, including the temporary ones that helped prop up State revenues in SFY 2024, are now a drag on revenues. The 2025 repeal of the Interest and Dividends Tax, which generated $184.6 million in SFY 2024, will continue to result in lower revenue collections for the State. The State’s earned interest on cash holdings continues to rise above the State Revenue Plan’s forecast, but was $12.9 million (35.4 percent) below last year’s collections for the first quarter. This source will diminish further over time, both with falling interest rates and as the State spends through one-time federal and surplus State funds.
The major tax revenue drivers for the State outside the business taxes did not have sufficient growth to offset the shortfalls. Meals and Rentals Tax revenue was $0.1 million (0.1 percent) above the State Revenue Plan for the first quarter, and Real Estate Transfer Tax revenue was $2.8 million (4.3 percent) behind its target. Insurance Premium Tax revenues, which have performed robustly in recent years, were $1.0 million (15.4 percent) above planned amounts for the first quarter. Tobacco Tax revenues were $1.8 million (3.7 percent) higher than expected in the first quarter, which is a positive result for a declining revenue source, but was not enough to build a full offset for the business tax revenues shortfall.
The result is that a rise in business tax revenues toward the end of last fiscal year, with favorable May and June receipts, now appears less like a long-term turnaround and more like a temporary uptick. With other revenue sources not growing sufficiently to fill the shortfall, the sluggish business tax revenues will be a drag on State finances as long as they continue.
Few Bright Spots for Revenues
This September revenue report did not signal an immediate major fiscal crunch, and offered some, but few, signals for optimism.
Lottery Commission revenues, which have expanded significantly in recent years, had a favorable September that was reportedly buoyed by high Powerball sales, pushing revenues to $2.7 million (8.9 percent) above planned amounts for the quarter and up $8.4 million (34.3 percent) over the first three months of last year. With newly-legalized Video Lottery Terminals potentially beginning to generate revenue this month, gambling is likely to grow in importance relative to State revenues overall in the next two years.
While Real Estate Transfer Tax revenues have fallen short of the State Revenue Plan, they are still higher than they were last year at this time. After declining following the COVID-19 pandemic’s impacts leading to a housing price boom, this year’s revenues were $7.2 million (13.2 percent) above year-to-date SFY 2025 revenues during the first three months. This trend suggests these revenues may be starting to turn upward again, but revenues will need to grow faster to catch up to their targets.
For now, policymakers may continue to be faced with slower business tax receipts. The two business taxes comprised about 35.3 percent of combined General and Education Trust Funds revenue in the unaudited estimates for SFY 2025. A persistent and significant shortfall in business tax revenues could be difficult to surmount, prompting more policy decisions about revenues and investments in public services.