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U.S. News

Tax day likely more bust than boom for U.S. states

CHICAGO (Reuters) - U.S. states are unlikely to get a big burst of money from income taxpayers at Thursday’s tax deadline to help ease their yawning budget gaps.

A tax form is pictured on tax deadline day at the main Post Office in New York April 15, 2009. REUTERS/Chip East

Collections from wage earners are expected to remain dismal as revenue lags low fiscal 2009 totals and in some cases just meets even-lower estimates for fiscal 2010.

“That means states will be limping toward the end of the fiscal year with further pain, further cuts,” said Scott Pattison, executive director of the National Association of State Budget Officers, adding that the April-May period is critical for states in terms of the personal income tax.

A modest economic recovery is now underway but federal and state tax payments due by April 15 reflect money earned in 2009 when the recession hammered the U.S. economy and unemployment peaked in some states.

“I think things do look like they are stabilizing and improving a little bit,” said New York State Budget Director Robert Megna. “But the April 15 results could still be a mixed bag, or we could still see poor results, because it’s really a reflection of what happened in 2009.”

State revenue and tax departments won’t have a good indication of April collections until the tax deadline has passed. Most taxpayers owing money wait until the last minute to pay liabilities. In Arizona, for example, about 80 percent of final income tax payments come after the tax deadline.

Still, 25 states reported personal income taxes were below targets for the first eight months of fiscal 2010, the National Conference of State Legislatures reported on Wednesday.

The states already closed collective budget gaps of $174 billion for fiscal 2010, which ends on June 30 for most states, according to the NCSL.

“If April turns out to be worse than projections, that raises the level of concern over revenue performance going into the next fiscal year,” said Arturo Perez, a fiscal analyst at the NCSL.

Personal income taxes account for about 36 percent of tax revenue in states that levy the tax, said Lucy Dadayan, an analyst at the Nelson A. Rockefeller Institute of Government.

“The employment in this recession was far worse compared to previous recessions,” she said. “Most economists forecast that the current recovery in employment will be much slower compared to prior recessions. Hence, we expect weak personal income tax revenues for the next few years.”

PLUGGING THE GAP

The Center on Budget and Policy Priorities, a nonpartisan research and policy institute, estimates the collective state budget shortfall will hit $140 billion in fiscal 2011, when factoring in the tail end of federal stimulus aid.

If states were to close budget gaps entirely through spending cuts it could cost 900,000 jobs in the next year and slow the economy, said Nick Johnson, director of the center’s state fiscal project.

Those cuts would affect schools, colleges, social service agencies, and businesses that sell goods and services to states. Local school districts, which are dependent on states for at least part of their funding, have seen employment drop by more than 100,000 jobs since July 2008, despite growing enrollments, Johnson added.

California, which faces a $20 billion budget hole, has collected $979 million less in personal income tax revenue so far this fiscal year versus the same period in fiscal 2009.

Illinois’ personal income tax collections were off $536 million as the state ended the third quarter of fiscal 2010 on March 31 with a nearly $4.5 billion pile of unpaid bills. Governor Pat Quinn has suggested raising the state’s 3 percent flat income tax rate by 1 percent to avoid massive cuts to education in fiscal 2011.

In Michigan, where the automotive industry pushed the state into recession before the rest of the United States, individual income taxes are down 19.4 percent or $420 million versus the same period in fiscal 2009. The state’s treasury department said refunds, which are averaging $608 this year versus $524 last year, were contributing to the decline.

Seven states, Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming, collect no personal income tax, while two states, New Hampshire and Tennessee, only tax dividends and interest income, according to the Federation of Tax Administrators.

Reporting by Karen Pierog, additional reporting by Jim Christie in San Francisco, Joan Gralla in New York, Elizabeth Flood Morrow in Albany, Michael Connor in Miami, Lisa Lambert in Washington; Editing by Andrew Hay

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