COVID Key Variable in Kentucky Economic Forecasts

Friday’s meeting of the Consensus Forecasting Group (CFG) painted an overall optimistic picture for the future of Kentucky’s economy, but models fluctuate depending upon changes in the pandemic.

COVID-19 threw forecasts for a loop. While Kentucky’s General Fund and Road Fund both finished ahead of FY 2021 predictions, the unpredictable nature of a pandemic economy paved an unusual route to get there.

Greg Harkenrider, deputy executive director for the Governor’s Office of Economic Analysis, told CFG members that FY 2021 sales, business, and property taxes significantly increased. Harkenrider called the 12% jump in sales tax the largest since 1991 when Kentucky increased the sales tax rate from 5% to 6%. Business and consumer taxes grew 38%, the most significant uptick since Fiscal Year 2006. The 9.2% gain in property taxes equaled the biggest boost in that category since 1984.

Both General Fund and Road Fund receipts increased, although the latter did only slightly. Last week, State Budget Director John Hicks testified about the 10.9% General Fund receipts increase in FY 2020, calling it the largest growth rate in 26 years. The Road Fund experienced a slight $7 million increase in revenue.

Road Fund totals were still below healthy levels needed to adequately fund essential infrastructure across the commonwealth. The Kentucky League of Cities continues to advocate for increased funding and modernization of the state’s road funding formulas. City spending on streets and roads climbed 36% from FY 2010 to FY 2019, while state and federal support dropped nearly 24%.

Looking ahead, economists considered the future of vaccination rates, adherence to guidelines, the emergence of dangerous variants, and infection rates as factors in the control, optimistic, and pessimistic forecasts.

Challenges forecasters face when predicting Fiscal Year 2022 and beyond include COVID-19-related changes to consumption patterns and exogenous wealth effects from federal fiscal stimulus.

The CFG projected sales tax revenue would increase 4.9% in FY 2022 and 1.9% in FY 2023, corporate taxes would decline 14.9% for FY 2022 but increase 1.2% in FY 2023, and property taxes would increase 1.2% in FY 2022 and 3.5% in FY 2023.

In all, the CFG anticipates a 0.9% increase in the General Fund in FY 2022 and a 2.3% increase in FY 2023. Those amount to budgets of $12.94 billion and $13.24 billion, respectively.

They predicted the Road Fund would increase 2.6% in FY 2022 and 0.9% in FY 2023 ‒ putting Road Fund collections at $1.69 billion in FY 2022 and $1.70 billion in FY 2023. The group projected that motor fuels taxes would bring in an additional 4.6% in FY 2022 and 3.8% in FY 2023.

The CFG will meet again in October to reevaluate conditions as they move closer to the 2022 session. Legislators will use the forecasts to craft the state’s biennial budget for FY 2022 and FY 2023.