‘Fiscal Cliff’ Tax Avoidance Boosted States’ 4th Quarter Tax Receipts

‘Fiscal Cliff’ Tax Avoidance Boosted States’ 4th Quarter Tax Receipts
April 24, 2013

Overall state tax revenues increased by 5.2 percent in the fourth quarter of 2012, according to the Nelson A. Rockefeller Institute of Government's latest quarterly report on taxes. Yet these data should not be seen as cause for celebration, said Lucy Dadayan and Donald J. Boyd, researchers at the institute and the report's authors. In the final months of 2012 taxpayers took actions to minimize federal tax liability in an effort to reduce the effects of the "fiscal cliff." 

Evidence of this, the researchers noted, occurred with the payment of 2012 fourth quarter estimated taxes on income not subject to withholding tax. In the 38 states from which the Rockefeller Institute has data for estimated tax payments, the median payment for the fourth quarter rose 25.2 percent from the year-ago period, up sharply from the 6.7 percent median growth for the first three payments.

This, they indicated, supports the conclusions of the Rockefeller Institute's previous quarterly State Revenue Report, which pointed to the likelihood of slightly depressed income tax revenue in the 2013-14 state fiscal years resulting from many filers shifting income to the 2012 tax year.

Weak in Every Category

Elsewhere, the report pointed to tepid increases in virtually every category of tax collection nationally. According to the report, in the fourth quarter:

  • Personal income tax collections increased by 10.8 percent (this is the 12th consecutive quarter that revenues rose).
  • Sales tax collections rose by 2.7 percent (this is also the 12th consecutive quarter that sales tax revenues have risen).
  • Corporate income taxes (which vary enormously around the country) rose by 1.2 percent.
  • Revenue from motor fuel taxes, tobacco taxes, alcoholic beverage taxes, motor vehicle licenses, and all other state taxes all either grew by less than 2.5 percent or declined.
  • Thirty-six states reported higher tax revenue collections than in the same quarter of 2007, at the start of the recession.

More Challenges for Local Governments

The institute pointed to continued weakness in local tax collections. For the quarter ending in December, the 2.3 percent growth in the four-quarter moving average of inflation-adjusted local tax collections is relatively weak compared to historical averages, and slightly weaker than in the previous quarter. As a result, the institute suggests, local governments could face continuing fiscal challenges if this weakness continues.

The Rockefeller Institute report noted, in the first two months of calendar year 2013, revenue in most states continued to grow, with 45 early reporting states pointing to increases in collections of 12.9 percent compared to the same months of 2012. Some of the growth, particularly in personal income tax revenues, may be artificially boosted at the expense of later years.

Taken on the whole, Dadayan and Boyd indicate sluggish growth continues to occur on a year-to-year basis. The researchers warned the sharp acceleration in estimated tax payments in the final quarter of 2012 and other behavioral shifts will make it harder for state officials to reliably forecast income revenue in the coming quarters.

Source: Nelson A. Rockefeller Institute of Government