States Seeing Big Drop In Income Tax Collections

States Seeing Big Drop In Income Tax Collections
June 13, 2014

States that collect personal income taxes enjoyed a strong growth in income tax collections last year but face widespread shortfalls this year, according to a new report from the Rockefeller Institute of Government.

The authors of "April 'Surprises' More Surprising Than Expected" examined January to April 2014 tax collections for 38 of the 41 states that impose broad-based personal income taxes. It showed an overall decline of 7.1 percent, or $8.4 billion, when compared to the same period a year earlier.

The large and widespread declines were mostly "due to the mirror-image impact of the federal 'fiscal cliff' that led to a one-time surge in income tax collections last year and reversal of that effect this year," according to the new report. Last year, states reported 23.6 percent growth in personal income tax collections in the months of January-April 2013 compared to January-April 2012.

‘Declines Surprised Officials’

"Declines in personal income tax collections were much anticipated but the size of the declines surprised officials in many states. It was extremely difficult for states to forecast personal income tax collections as it was hard to sort out the impact of income acceleration from tax year 2013 to tax year 2012 relative to the countervailing effect of the strong 2013 stock market. While many states tried to be cautious in their forecasts, early figures indicate that income tax collections are below the forecasts in many states," according to the report.

Overall, 33 of the 38 states covered in the report experienced personal income tax fall-offs, ranging from a high of 31.1 percent in Ohio to a low of 0.6 percent drop-off in Pennsylvania. Five of the 38 states studied reported an increase. Data were not available yet for Hawaii, Minnesota, and New Mexico.

The bulk of the decline occurred in April and took place in estimated and final payments associated with non-wage income such as capital gains and other investment income. In fact, withholding showed a relatively strong growth of 5.4 percent in the months of January-April 2014 compared to the same period of last year. By contrast, both estimated payments and revenue from income tax returns dropped by more than 17 percent in January-April of 2014.

Sign of Tax Shifting

The declines in non-wage income tax collections are a clear indication many taxpayers shifted income from tax year 2013 to tax year 2012 to minimize their federal tax liability. Therefore, the declines in overall income tax collections are not a sign of weakening of an overall economy.

Nonetheless, the inconsistent revenues created enormous challenges for states with resulting shortfalls, adding more turmoil and pressure to budget discussions.

Lucy Dadayan (ldadayan@albany.edu) is a senior policy analyst at the Rockefeller Institute of Government. Donald J. Boyd (donboyd5@gmail.com) is a senior fellow at the Rockefeller Institute of Government.

Internet Info

“April Surprises More Surprising Than Expected,” Lucy Dadayan and Donald J. Boyd, Rockefeller Institute of Government: http://heartland.org/policy-documents/april-surprises-more-surprising-expected