WASHINGTON — Personal income taxes and possibly all state taxes appear to be down in the second quarter of this year based on preliminary data, the Rockefeller Institute of Government of the State University of New York says in a report released Thursday.
The second-quarter downturn follows a 0.3% decline in the first quarter, the first time state tax revenues declined after four years of growth, the report says. Although year-to-date figures show 2.8% growth in overall state tax collections during the first three quarters of fiscal 2014 compared to the same period the previous year, personal income tax collections dipped 1.2% in the first quarter. Preliminary second quarter data from 36 states shows a 6.5% year-over-year income tax drop and a 0.8% overall decline.
"The declines in tax collections are not an indication of a slowdown in the economy, but are mostly due to the mirror-image effect of the initial fiscal cliff," the report says, explaining that many taxpayers shifted income from tax year 2013 to tax year 2012 to minimize their federal tax liability, greatly affecting capital gains income where many states reported large losses.
But sales tax collections have been more robust, showing 1.7% first quarter growth from the same period in 2013, the seventeenth quarter in a row that they rose. The preliminary figures indicate a 4.5% second quarter increase, according to the Rockefeller report. Most states rely on the sales tax for about 30% of their tax revenue, the report says.
The report links the tax trends to three underlying factors: changes in state-level economies; the ways those changes affect the tax systems in each state; and any legislative changes to those tax systems. For example, legislative tax changes in Ohio will cause an estimated to cause a $1.6 billion loss in fiscal year 2014, the report says.
Among individual states, forty-three states reported tax collection growth in the first three quarters of fiscal 2014 and seven reported declines. North Dakota, where the economy has boomed along with its energy industry in the past decade, reported the largest growth at 18.6%. Alaska reported the largest decline at 41.7%.
States officials are having difficulty forecasting revenues because of the volatility of the economic activity upon which they rely, as well as actions beyond their control, the report says.
"The temporary solutions to address budget shortfalls caused by the Great Recession, as well as federal actions related to the 'fiscal cliff'" and sequestration, led to further growth in revenue volatility," the report explains. "In many states, officials have been puzzled with the uncertainty and are facing challenges in forecasting revenues due to growing revenue volatility driven by uncontrollable factors."
