SAN FRANCISCO - States will have even more trouble than usual this year estimating capital gains tax revenues, Standard & Poor's
"This lack of certainty is especially hard on states that are heavily dependent on this source of revenue and some states, we believe, could face unpleasant surprises when income tax returns are in," said the report by analyst David Hitchcock.
Capital gains receipts are particularly tricky, Hitchcock wrote, because they carry much more inherent uncertainty until tax returns are filed than personal income taxes on wages, which can be tracked through the year through withholding.
"Due to the one-time and discretionary nature of capital gains, we believe that states often can't get a definitive view of their capital gains tax revenue until May, after state income tax returns have been filed," his report said.
The effect, and uncertainty, is magnified in states with progressive tax rates, the report said, citing examples from Massachusetts, New York, and California.
The issue has not escaped the attention of some affected officials.
In California Controller John Chiang's most recent monthly report on the state's general fund cash receipts, his staff pegged capital gains as an area of concern. For the first eight months of fiscal 2009, personal income tax collections were 11% behind the same period a year earlier, the report said.
"Despite representing less than a quarter of all personal income tax receipts, nearly two-thirds of the decline is in estimated tax payments - money collected on capital gains and the self-employed," the report said. "As asset prices have collapsed, so have capital gains on these investments, which has substantially reduced estimated personal income taxes. A similar decline was seen in the wake of the 2000 collapse of the state income tax revenue."
Hitchcock's report also points to California's 2000 experience as a warning.
"California's stock option and capital gains tax comprised nearly a quarter of the state's general fund revenue at its peak in fiscal 2001," the report said. "The subsequent drop in capital gains tax revenue contributed greatly, in our opinion, to the state's fiscal difficulties during fiscals 2002-2004, and capital gains tax volatility still aggravates current state budget pressures."
Oregon state economist Tom Potiowsky described capital gains taxes as a major forecast risk in his most recent quarterly report, filed in February.
Oregon has a top marginal income tax rate of 9%, one of the nation's highest.
"Capital gains income exceeded 10% of income for the first time in the 2007 tax year," the report said. "This exposure contributes to the volatility in personal income taxes because the financial decisions on the part of a relatively few individuals can have a significant impact on the aggregate levels."
