States may see an April bounce in income tax revenue

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California and Connecticut income tax revenues were higher than anticipated in April, which could be a good sign for other income-tax dependent states.

It appears that the 13% increase in California tax collections through March 2018 resulted primarily from the expansion in the state’s economy, instead of taxpayers' efforts to make the best of the new federal tax laws, Matthew Butler, a Moody’s Investors Service analyst, wrote in a May 3 report.

There was a slight shift in the timing of payments, but it was small, Butler wrote.

“Personal income taxes are especially important to California, because they make up roughly two-thirds of annual general fund revenue,” Butler wrote.

California collected $14.2 billion in income taxes in April, not the $13.5 billion anticipated in projections. Connecticut estimates it brought in $1.3 billion more than expected, according to Moody’s.

“For Connecticut, which has been experiencing weaker fiscal and economic metrics, it means they have a surplus that will make budgeting next year easier,” said Emily Raimes, a Moody's analyst. “California has been seeing strong liquidity and strong reserves. For them, it’s a windfall as they are not facing the challenges in Connecticut, but it could result in tension as politicians try to decide whether to put it into reserves or spend it on ongoing programs.”

That wrangling has already begun over an estimated $6.1 billion surplus reported by California Gov. Jerry Brown’s administration in January. He wanted the money to go into reserves. State legislators and 11 mayors have asked that $1.2 billion of it go to programs for combating homelessness.

Brown on Friday will unveil the annual May revision to the draft budget he introduced in January.

The robust April income tax revenues reported by California and Connecticutcould mean fears that increased December revenues would result in lowered April revenues might not prove true, Raimes said.

“There could actually be something of a bounce in April,” Raimes said.

California and Connecticut are the first to report April revenues, so it will be easier to form conclusions as other states report revenues in the next few weeks, Raimes said.

It’s tough to tell which states might see April bumps because analysts don’t have enough data to know what is going on behind the numbers at this point, Raimes said.

“In California there is both a strong underlying economy and a larger number of tax filers, who claim the SALT deduction,” Raimes said. “The cap on the deduction might have had some people pulling some money into 2017, but the state also has the tax conformity with the federal government.”

The strength in the economy nationally also was considered a factor.

“It is a little bit like peeling back the onion to uncover the different reasons of what is going on,” Raimes said. “But early signs from these states are leaning toward positive revenue results.”

The California Legislative Analyst’s Office called April the most important revenue month for the state, because taxpayers file returns for their personal income tax. Taxpayers make estimated payments on their 2018 tax liabilities as well as final and extension payments on their 2017 tax liabilities in April, said the LAO, the fiscal and policy adviser to the Legislature.

Not only did April collections come in $689 million ahead of the administration’s projections, the year-to-date income tax collections are $2.8 billion above projections, the LAO said.

The LAO zeroed in on two factors relative to the federal tax law that might have impacted the state’s receipts though it said it will need data from April 2019 to know for sure.

While changes in SALT appeared to incentivize taxpayers to pay early in December, a reduction in tax rates also created an incentive for taxpayers to delay income from 2017 to 2018, the LAO said.

The state experienced a 66% bump in income taxes to $7.7 billion in December 2017 from $4.6 billion in December 2016 and January income tax payments were down 25%, the LAO said.

“This suggest that the December 2017 surge was not just a matter of timing,” the LAO said, “rather that ongoing growth in tax payments appears to be healthy.”

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