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U.S. tax cut hopes sent state collections down in April

EconomyMay 20, 2017 01:31AM ET
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© Reuters. FILE PHOTO - Crates filled with 2011 tax forms are seen at the 96th Street Public Library in New York

By Karen Pierog

CHICAGO (Reuters) - U.S. states collected less personal income tax revenue in April than they did a year earlier, a Reuters analysis shows, and analysts said they believed high earners were shifting income to next year, hoping for tax cuts from the federal government.

State personal income tax (PIT) revenue dropped an average of 6.6 percent in April from the same month last year in the 27 states for which Reuters has data. Removing outliers Louisiana and Oregon, which had big gains due to technical factors, magnified the drop to 7.6 percent from last year.

Taxes on wages and investment income are a top revenue source for the 43 states that collect it. April is the most important revenue month due to the tax filing deadline and the tendency of taxpayers who owe money to wait until the last minute to pay.

"We believe the declines are mostly driven by the taxpayer behavior, particularly for non-witholding income," explained Lucy Dadayan, senior research scientist at the Rockefeller Institute of Government in Albany, New York.

"The federal government has made it clear they are going to reduce the tax rates for income. Analyzing their rhetoric it appears this will happen, in particular, for higher income taxpayers. Therefore we think taxpayers are shifting income to 2017 from 2016" hoping for a tax cut, she said.

Personal income taxes make up slightly more than a third of states' total general fund revenue, and sales taxes comprise roughly another third.

Personal income tax collections have been volatile in recent years, including 2013's "April Surprise," which delivered unexpectedly high revenue to states as taxpayers sold investments to dodge an increase in federal taxes.

Revenue from the tax plunged in April 2014, rebounded in 2015, and slumped last year.

"April is a big month for state income taxes. A decline in February is not so bad, but a decline in April, fiscally, has more consequence," John Hicks, executive director of the National Association of State Budget Officers in Washington, DC.

California collected $640.6 million this April, down 4.8 percent from April 2016. Controller Betty Yee called the decline a signal "we may be inching towards an economic downturn."

“April is usually the state’s biggest tax filing month, so lower-than-expected personal income tax receipts are troubling,” Yee said in a statement.

Lower revenue was also troubling in states struggling with budget gaps. In Oklahoma, collections were just $1.9 million below the previous April, but missed estimates by $84.7 million or 21.1 percent. Nebraska's receipts were down 13.1 percent from April 2016, but $55 million or 18.2 percent below estimates.

Collections were down 12.6 percent in Connecticut, which was downgraded by all three major credit rating agencies this month due in part to a revenue slump.

North Carolina Budget Director Charles Perusse attributed most of the 29 percent drop in collections to tax return processing delays and tax changes. He added that full-year income tax revenue should still exceed budget estimates by $432 million. 

Technical factors caused revenue to jump year-to-year in Louisiana and Oregon. In Louisiana, collections were up a whopping 318.3 percent, but state revenue department spokesman Byron Henderson said April 2016 receipts were skewed lower because refunds outpaced withholding collections.

Millions of dollars in tax surplus credits paid by Oregon last year artificially depressed April 2016 receipts, leading to the 76 percent jump in collections this April, said Bob Estabrook, spokesman for the state revenue department.

For Illinois, which has gone almost two fiscal years without a full budget, the 5.3 percent increase was "disappointing."

"While still positive, the monthly performance can be viewed as disappointing as a stronger month stemming from final payments was anticipated," the state legislature's Commission on Government Forecasting and Accountability said in a report.

Seven states - Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming - collect no income tax, and two - New Hampshire and Tennessee - tax dividend and interest income, but not wages.

U.S. tax cut hopes sent state collections down in April

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