April income tax collections climb in many states, but may be a blip

Thu May 16, 2013 5:13pm EDT

(Reuters) - Personal income tax collections rose by 37 percent in April from a year ago, according to a sample of U.S. states, but the improvements may not continue as a still-shaky economy, tax cuts in some states and federal budget woes could team up to depress revenue growth.

Excluding California, which had the biggest gain of the 21 states that have so far reported collections in April, the total increase was still a solid 22 percent.

The reports showed collections were up by a median 24.41 percent in April - when taxpayers face a mid-month tax filing deadline.

In April 2012, for all the states which collect personal income taxes the nationwide increase from the year before was a more modest 7.1 percent, according to data from the Rockefeller Institute of Government, which tracks state revenue. The median change among all states stood at 8.6 percent.

"There is nothing going on in the underlying economy that could support those kinds of increases on an ongoing basis," said Don Boyd, a senior fellow at the Rockefeller Institute.

Seven states - Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming - collect no personal income tax, while two, New Hampshire and Tennessee, only tax dividends and interest income.

Because tax cuts passed under former President George W. Bush were set to expire at the end of 2012, many taxpayers sold investments or made other financial moves in the waning days of last year to avoid potentially steep tax bills in 2013. In addition, some companies made special dividend payments to investors, while some employers may have accelerated bonus payments to executives.

This burst of income buoyed states, which often pattern their tax codes after the federal government's. The Congressional Budget Office earlier this week slashed its federal deficit forecast, largely due to rising personal income tax revenue at the national level.

Personal income taxes provide 36.3 percent of state revenue, followed by sales taxes, which represent 31.5 percent of the money all states bring in, according to the U.S. Census.

Boyd said states should understand that the big revenue jumps they are seeing may not be ongoing. A recent report by the institute urged states to be cautious, pointing to data suggesting a still weak economy.

In Illinois, income tax collections jumped by 33 percent to $3.14 billion last month, according to a legislative commission report.

The Commission on Government Forecasting and Accountability warned that Illinois' jobless rate, which at 9.5 percent in March was the second-highest among states, and other factors make it dangerous to "assume that the current good fortune will continue into the upcoming fiscal year."

Governor Pat Quinn said the one-time revenue surge will be used to pay down the state's backlog of unpaid, overdue bills, which have topped $9 billion despite the fact the state increased its flat personal income tax rate by 67 percent in 2011.

California's nearly 74 percent jump in personal income taxes paid in April compared to April 2012 was the biggest among the states.

The revenue surge in California partly reflected the effect of increased income tax rates for wealthy taxpayers approved by voters in November. The new rates were retroactive to last year.

Still, collections were $275 million, or 2.2 percent, below the estimate in Governor Jerry Brown's budget.

"This was largely due to fewer returns filed and more refunds paid out than expected in the month of April," said a report from State Controller John Chiang.

Kansas, which had one of the smallest increases - 5.7 percent - in the sampling of states, restructured its personal income tax in 2012 by reducing rates and increasing deductions.

MORE TAX CHANGES AHEAD?

States, which enacted a slew of tax changes in 2009 to deal with the crippling effects of the 2007-2009 recession, have once again turned their attention to taxes now that their economies have largely stabilized, said Todd Haggerty, a policy analyst at the National Conference of State Legislatures.

A recent survey by the group found 35 states taking up tax reform in their current legislative sessions, with 16 eyeing changes to personal income taxes, he said, adding that tax reduction proposals slightly outnumber tax hikes.

On Monday, Oklahoma Governor Mary Fallin signed into law a bill that phases in a drop in the state's top 5.25 percent income tax rate to 4.85 percent in 2016. North Dakota Governor Jack Dalrymple earlier this month signed a $200 million, or 20 percent, income tax cut for individuals. Minnesota lawmakers are working on legislation to hike the income tax rate for high earners.

Another factor playing into income tax collections is the fallout from the U.S. government's debt crisis, which led to across-the-board spending cuts that started in March.

Virginia, which has a sizeable share of federal workers and contractors, only saw a 5.5 percent increase in individual income taxes paid last month versus a 16.2 percent jump in April 2012.

Employers and shoppers in Virginia grew cautious as negotiations over the so-called fiscal cliff revved up last fall, which meant the federal cuts also hit the state's sales taxes.

"We expected a little bit of cooling. Remember we're probably affected more by the federal government than pretty much any other state, with the seat of the national government at our doorstep," said Virginia Finance Secretary Ric Brown, adding that income tax revenues are still ahead of the projections used to draft the budget.

"We went to the conservative side, thinking that was the best course for us in the revenue forecast. That has probably proved to be a good decision for us as we come down to the wire this year," he said.

(Reporting by Karen Pierog and Lisa Lambert, additional reporting by Jim Christie; Editing by Tiziana Barghini and Carol Bishopric)

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