WASHINGTON — Despite a recent 37% surge in federal non-withheld income tax revenues, a new Rockefeller Institute study warns that the tax data may be deceiving and not equate to a rapidly recovering economy.
“States with income taxes will have a little joy, perhaps a little sorrow, and an abundance of uncertainty,” wrote Institute researchers Don Boyd and Lucy Dadayan.
A small number of taxpayers with large, volatile, uncertain and sometimes movable non-wage income can dominate April income tax collections, the report said.
“When this kind of income spikes or falls, taxpayers often adjust their payments of estimated tax in September or January, and ‘settle up’ when they file their returns in April,” Boyd and Dadayan wrote.
In 2012, taxpayers knew that federal income taxes were scheduled to rise in 2013 after the year-end “fiscal cliff” agreement materialized and the top income tax rate rose to 39.6% from 35%. Therefore the report suggests that taxpayers had an incentive to accelerate income into 2012 from 2013 and later years to lower their overall tax liability. For example, capital gains are the easiest form of income to move.
A similar surge in state tax collections in the first four months of 2013 also appears to be the result in large part from income accelerated into 2012, the report said. One early sign that taxpayers accelerated their income was found in the final quarter of estimated taxes to states which rose by 25.2%, up from 6.7% in the first three quarters of 2012.
California income tax revenue in April was approximately $4.5 billion more than expected and analysts attribute some of it to accelerate income. Connecticut, Illinois, Nebraska and Pennsylvania all saw jumps in tax revenues as well. The Rockefeller Institute expects other states will report revenue surges as well.
Boyd and Dadayan said that reviewing April tax-return revenue surges is tricky because it could mean the economy in the previous year actually was stronger than previously thought and longer term revenue outlook could be better than believed.
However, they warn most of the economic data suggests the “temporary surge in revenue may mask underlying weakness in the economy.”
“Over the longer term, this could be bad news — it could mean that accelerated money received now, used to pay current bills, will not be there to pay for services in the future,” the report cautioned.