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States seeing big drop in income tax collections

Widespread shortfalls.

This article originally appeared on heartland.org.

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 Rockefeller Institute of Government report.

The report —-  “April ‘Surprises’ More Surprising Than Expected” —-  examined January to April 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 was in the month of April and was in estimated and final payments that are 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. On the contrary, both estimated payments and 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 that many taxpayers shifted income from tax year 2013 to tax year 2012 to minimize federal tax liability. Therefore, the declines in overall income tax collections are not a sign of weakening of an overall economy.

Regardless of the reasons, they created enormous challenges for states with resulting shortfalls, and have added more turmoil to budget pressures.

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.

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