State Economists Pessimistic About Outlook

Posted on January 3, 2018

     Economists tasked with predicting Kentucky’s economic future had a tough time Friday picking the best route. The Consensus Forecasting Group met for hours Friday morning to set the outlook for the state’s General Fund and the Road Fund. Members of the Group decided to adopt a pessimistic scenario for the General Fund but went with what is called a controlled outlook for the Road Fund. That scenario is basically one that predicts finances will stay relatively flat.

     The Consensus Forecasting Group is made up of seven economists, most from Kentucky colleges and universities, who forecast for national and state economic conditions. The projections are used to develop expenditure plans for the state. Members of the group at Friday’s meeting worried uncertainty with national lawmakers would make predicting future tax and spending patterns difficult. The group has to set the outlook for Kentucky for the next five years.

     Adopting a pessimistic scenario for the General Fund means the state could have to deal with another budget shortfall. The projections adopted Friday are more than $200 million less than previously predicted. The projections are not final until December, and the Group will meet again in October. State budget officials testifying Friday told members of the Group the state is seeing sizeable drops in corporate taxes and the coal tax. Income from the cigarette tax has also seen steady declines, but officials with the state think recent hikes in cigarette taxes in nearby states may help boost Kentucky’s sales.

     The state’s Road Fund saw growth in Fiscal Year 2017, mostly due to a hike in the motor vehicle usage tax. The fund ended up bringing in $51 million more than excepted in FY 2017. The motor fuel tax is the largest portion of the Road Fund, and the part divided among cities and counties through an antiquated revenue sharing formula. Friday, state officials testified fuel prices were below expectations in FY 2017 and aren’t predicted to climb above an amount that would generate an increase in the gas tax until FY 2021.

     By adopting the control scenario for the Road Fund, the Group is setting projections for the motor fuels tax at $758.3 million for FY 2018, $763.8 million for FY 2019, $763.1 million for FY 2020, $755.6 million for FY 2021 and $768.5 million for FY 2022. Gas tax revenue is divided among cities and counties using a “formula of fifths” that was adopted in 1948. A proposal before lawmakers in the 2017 Regular Session of the General Assembly would have updated the formula. The proposal is to repurpose amounts over $886.2 million with a new formula that’s based on road usage and population. The $886.2 million is the amount of motor fuel tax Kentucky earned in Fiscal Year 2014, the largest income earned by the tax in a ten-year period. Projections set Friday do not expect the amount collected to reach that level in the next five years.

     EKU professor Frank O’Connor, who is a member of the Group, questioned if the five-year prediction needed to consider the impact electric cars could have on the future. Group member David Sinclair, an economist for LG&E, reassured members doubling the number of electric cars in Kentucky in five years would still not be enough to have a major impact on the Road Fund. The control scenario adopted by the Group Friday puts the Road Fund’s projected Fiscal Year 2018 income at $1.5 billion, a .2 percent decrease in projected receipts for the current fiscal year.

     The state did see record sales in Fiscal Year 2017 for the Kentucky Lottery, but those funds are used for scholarships in Kentucky and do not go into the General Fund.