Personal income tax collections plunged last month from a year
earlier in 27 of 32 states for which Reuters was able to collect
data. That's most of the 43 states that levy income taxes, and drops
were as high as 50 percent.
While many states predicted tough times this year, a handful
including New Jersey and Pennsylvania is set to face hard decisions
on either cutting spending or raising taxes.
New Jersey, for example, is cutting state contributions to the
pensions system by 60 percent for the next two years. By the end of
last year, 26 states had still not seen overall tax revenue return
to pre-recession levels, according to recent data from Pew
"There are states that are more cautious, but there is also New
Jersey. There is also Kansas, Pennsylvania," said Lucy Dadayan, a
senior policy analyst at the Rockefeller Institute of Government.
"Their projections are more optimistic than the reality," she said.
"They either have to cut services - have to cut on the spending side
- or raise taxes."
Even overall, states' prospects for growth in the first half of
calendar 2014 are "very, very weak," she added. "And then we'll see
a very slow rebounding."
New Jersey this week emerged as the poster child for the issue.
Governor Chris Christie unveiled a shortfall of more than $1 billion
for the budget year ending in just six weeks. A massive drop in
April income tax collections was the main culprit, although the
state has not detailed just how far below target they were.
April is the most important month for income tax revenues because of
state and federal filing deadlines, and taxpayers writing the
biggest checks tend to file at the last moment.
Part of the drop in revenues reflects a rush to pay last year,
before tax hikes took effect. Many sold stocks, for example, to take
the tax hit while rates were relatively low. But the drop still
signals that a key revenue source for many states will be weak this
Income tax revenues declined by an average of 13 percent from the
previous April in the 32 states for which Reuters has data. Only
five states took in more year over year: Delaware, Mississippi,
Oklahoma, Oregon and Virginia.
Personal income taxes make up a little more than a third of states'
total general fund revenue, and sales taxes comprise roughly another
third. Just seven states - Alaska, Florida, Nevada, South Dakota,
Texas, Washington and Wyoming - collect no income tax, and two
others - New Hampshire and Tennessee - only tax dividend and
interest income, not wages.
ANTICIPATED BY MOST, BUT NOT ALL
When states drafted their budgets for this fiscal year, which
started for most on July 1, 2013, many predicted overall revenue
would remain relatively flat.
The average revenue forecast called for an increase of just 1.3
percent, according to Arturo Perez, fiscal affairs director at the
National Conference of State Legislatures.
On balance, most states' overall revenue pictures are not suffering
as much as the income tax declines might suggest, and some income
taxes are collected outside of April, giving states time to still
catch up, Perez said.
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So, for cash-strapped Illinois, a 19.3 percent drop in income tax
collections last month was actually good news because state
officials had anticipated the plunge, and then some. As a result,
officials boosted estimated general fund revenue for the 2014 budget
up by $588 million.
But that windfall may be fleeting. Illinois legislators are engaged
in fierce debate about whether to extend a 2011 tax increase due to
partially expire on January 1, 2015, halfway through the next fiscal
year. Letting it lapse will drop the tax rate to 3.75 percent from 5
percent and could cost the state more than $1.2 billion in just the
second half of the 2015 budget year.
The biggest drop came in
California, where April income tax collections were down $1.5
billion from a year earlier. But they were still $83 million more
than the state had targeted.
Not every state was as sage as Illinois or California in its
Take Michigan, with an economy still smaller than before the
recession, a 7.4 percent unemployment rate that is well above the
national rate of 6.3 percent, and its largest city, Detroit,
struggling through the country's biggest municipal bankruptcy.
There, a 32.8 percent drop in April income taxes led officials in
Michigan's capital, Lansing, last week to cut revenue forecasts for
the current fiscal year by $317 million.
In Pennsylvania, April revenue fell just 4.4 percent from a year
earlier, but still came in well below target, contributing to a
shortfall of close to $1.4 billion through next year, according to
independent state analysts.
TAX CUT IMPACTS
Tax cuts are also a factor. Eighteen states cut personal income
taxes in 2013, while six increased them.
In Ohio, which enacted a $2.6 billion, three-year tax cut last year,
April income tax collections fell by 45 percent. The state, however,
partially offset the revenue loss by increasing the state sales tax.
Ohio's jobless rate, meanwhile, has dropped steeply this year to 5.7
percent last month from 7.3 percent in April 2013.
The only state to see a bigger percentage drop in income tax
receipts was Kansas, which in 2012 passed a big cut in tax rates.
Collections fell 50 percent to $226 million from $453 million.
That's nearly $90 million less than projected by Kansas.
Moody's Investors Service in April cut Kansas' credit rating a notch
to Aa2, citing, among other factors, tax cuts that were not fully
offset with recurring spending cuts.
(Additional reporting by Robin Respaut in San Francisco and Hilary
Russ in New York; Editing by Dan Burns and Peter Henderson)
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