The personal income tax is the single largest source of revenue to state governments, representing over 45% of total state general fund revenue in fiscal 2017 according to NASBO’s State Expenditure Report. Forty-one states have a broad-based personal income tax while the other nine states do not. April is typically the month with the highest amount of personal income tax collections.
December estimated payments surged – Would April returns give them back?
Recent national reports have highlighted the unique surge in state personal income tax revenues this past December. The Rockefeller Institute reported that state personal income tax revenues for the October through December, 2017 period grew at a median rate of 10.4 percent over the prior year. That report and many state-specific revenue reports concluded that the unusually high rate of growth was likely due to taxpayers’ responses to recent changes in federal tax law. The report states that individuals paid estimated taxes in advance so that they could deduct more state taxes from their 2017 federal income tax before the new $10,000 state and local tax deduction limit takes effect for the 2018 tax year. Observers of state revenues were wary of April tax return results, expecting that the likely advance payments made in December would be potentially given back or offset by large refunds and lower final and estimated payments in April.
It wasn’t all a shift in timing - April growth of 10.8%, December through April growth of 13.5%
Thirty-seven states, as of this writing, have reported their April 2018 personal income tax collections. The median April increase in total net personal income tax collections is 10.8 percent; much higher than expected. For the five months from December 2017 through April 2018, median personal income tax collections grew by 13.5 percent over the same period last year. December was the month that saw many advance payments; the five-month measurement reflects a more complete view. While not all states report the detailed amounts attributable to withholding, final tax return payments, and estimated payments, those that did saw that refunds were less than expected and tax return payments and estimated payments were more than expected.
How much of it is one-time money?
One of the next steps for states will be to further analyze their collections to understand the amounts that may be of a one-time nature, such as higher than normal capital gains and dividend income, or repatriated income in response to the federal tax changes. Colorado, in its most recent updated revenue forecast stated that, “…the delay of some investment income gains from 2016 to 2017, combined with a burgeoning stock market, is bolstering income tax revenue growth.”
Risks to the increased revenues
The season for tax year 2017 will not be complete until October 2018 when tax filers seeking extensions must complete their returns. Extension overpayments made in the meantime to avoid penalties could result in higher refunds later. The month of June is also a big month for personal income tax collections due to quarterly estimated payment timelines. That information will also provide further insight into personal income tax trends.
What does the growth in personal income tax collections mean for states?
Due to the strong growth in personal income tax collections, it is likely that many states will end fiscal 2018 with revenues above budgeted projections. This would mark a noticeable improvement from fiscal 2017 when 27 states saw revenues come in below original projections according to NASBO’s Fiscal Survey of States. However, it remains to be seen how much of the revenue increase will carry forward to fiscal 2019, and how much of it was one-time money due to recent changes in federal tax law.
State Revenue Report Quotes:
Illinois: “While a precise component breakdown is not yet available for April’s income tax receipts, preliminary data indicate that another reason for April’s impressive performance was due to strong final day extension payments. Presumably, this was due to non-wage related revenues. Such items could include dividends and capital gains stemming from market conditions in tax year 2017, as well as remnant one-time impacts from federal tax changes [i.e. repatriated income]. Also, to the extent taxpayers filing extensions overpaid to avoid penalty, that may manifest in increased future refund demand next fiscal year when returns are finalized, although it’s too early to quantify such impacts.”
California: “Recent changes in federal tax law created an incentive for taxpayers to shift estimated payments relating to their 2017 tax liabilities from January and/or April 2018 into December 2017. December 2017 saw a large surge of estimated payments—$7.7 billion compared with $4.6 billion in December 2016, for a 66 percent year-over-year gain…Tax payments appear to have been shifted from January 2018 to December 2017, as estimated payments in January were 25 percent below the year prior. That weakness, however, did not appear to carry into April 2018, as final and extension payments were 9 percent above the year prior. Over the December 2017 through April 2018 period, payments relating to 2017 tax liabilities were almost 13 percent above payments over the same period of 2016-2017. This suggests that the December 2017 surge was not just a matter of timing…Accordingly, it does not appear that taxpayers made decisions to defer large amounts of income into 2018. That said, it is possible that taxpayers are making estimated payments on some other basis. We will need data on estimated payments in June, September, and December/January, as well as final and extension payments in April 2019, before reaching any conclusions concerning the extent to which taxpayers deferred 2017 income into 2018.”
Massachusetts: “Since December and January, when estimated payments were likely accelerated due to federal tax reform, DOR has been closely monitoring the non-withheld income categories to see if there would be a potential correction in subsequent months…Overall through April, however, non-withholding income as a whole remains substantially above benchmark, while income tax withholding and sales tax were also above benchmark, reflecting improving labor market conditions and consumer spending on taxable items.”
Ohio: “Although the tax year 2017 filing season does not officially end until October 2018 when timely extension filers must submit their annual returns (and make any final payment or request any refund owed), annual return payments have so far exceeded estimate while refunds issued through April were below forecast. This occurred even with the influx of estimated tax payments made at the end of calendar year 2017 that were theorized to have been partly due to taxpayers making final use of the unlimited federal income tax deduction for state and local taxes paid. Although there remains the risk that such payments could increase refunds in October, all evidence so far indicates that tax year 2017 will still end up stronger than anticipated.”
New Jersey: “April is the largest month of the year for tax collections, especially for the Gross Income Tax (GIT). Net receipts of $2.3 billion were down $23.1 million, or 1.0 percent below last April. However, this was anticipated due to the expectation that certain taxpayers had pre-paid about $200 million of April tax payments in December 2017 to take advantage of the expiring uncapped federal State and Local Tax (SALT) deduction.”
NASBO will continue to monitor April tax receipts and update this blog with new information.