Softening tax collections plague state, local budgets
The slow but steady recovery of state tax revenues, which has had some newspapers sporting talk of new budget surpluses around the country, is rapidly disappearing as new tax numbers come in. In mid-April the Rockefeller Institute of Government reported a significant slowdown in tax collections in the last quarter of calender 2013, to 2 percent after inflation, down from 4.3 percent in the third quarter, 8.1 in the second quarter and 7.4 in the first quarter. Then the institute delivered more bad news, this time for the first quarter of 2014.
In a preliminary report, the institute noted that total state revenues were likely to increase by a meager 0.7 percent in the first quarter. About a dozen states reported declines in personal income taxes in the first quarter vs. the same quarter last year, while nearly two dozen recorded a fall in corporate tax collections.
One problem remains that personal income tax collections in many states are increasingly unpredictable thanks to the volatile nature of the stock market. Budget forecasters have had trouble in particular trying to determine whether the sharp rise in personal income tax collections at the end of 2012, when many individuals took capital gains in order to avoid an increase in federal taxes in 2013, would continue.
“Officials in many states have been facing extraordinary challenges in forecasting income taxes due to uncertainties related to capital gains,” the report noted.
Some analysts hoped that a strong stock market would provide new gains, but those did not materialize.
Among the biggest losers has been California, which raised taxes through Proposition 30 last year. Personal income tax collections are down an estimated 11 percent in the first quarter.
States also are seeing a somewhat unanticipated softening in sales tax collections in part because of the cold winter. Twelve states registered declines in sales tax collections vs. the first quarter of 2013, and across the country aggregate sales tax revenues rose just 1 percent.
These declines are coming just as states and most municipalities debate their budgets for the new fiscal year, which generally starts July 1. The optimism in new budget proposals released in January and February is rapidly fading as the long but very slow recovery in state taxes which began in 2010, after five consecutive quarters of tax declines, sputters.