Budget Blog

April State Income Tax Collections have Mostly Recovered from Declines in December and January

By John Hicks posted 05-16-2019 10:31 AM

Updated June 4, 2019

States are reporting higher than expected income tax revenues in the month of April. The significantly higher April income tax revenues, for the most part, are making up for the substantially lower income tax revenues collected in December and January. Through November, year-to-date income tax revenue growth was 6.7 percent. Through January, year-to-date growth had declined to 0.6 percent. Following April’s strong collections, it now appears that year-to-date growth is returning to November levels.

Personal Income Tax Annual Fiscal Year-to-Date Growth Rates

State Income Tax Revenue Growth in Fiscal Year 2018 and Early Fiscal Year 2019
Personal income tax receipts for fiscal year 2018 grew by 8.1 percent, substantially higher than the 2.5 percent growth rate in fiscal 2017. That healthy growth rate continued into the early months of fiscal year 2019. Personal income tax receipts for July through November increased at the rate of 6.7 percent. Then December and January receipts dropped precipitously. State revenue reports were surmising that due to the new federal limit on deducting state and local taxes, taxpayers had far less incentive to make their estimated payments by the end of the calendar year, causing estimated payments to drop significantly.

Income Tax Payment Timing Changed due to New Federal Limits on Deductions
Recent testimony from the New Jersey Treasurer, Elizabeth Maher Muoio, stated that before the federal limit was imposed, between 50 to 60 percent of estimated payments due in January were prepaid by the end of December for tax planning purposes. Many state revenue reports made similar statements after December tax receipts were known.
Another unexpected event occurred in January. The first quarterly estimated payments due in January bottomed out. More clarity on this event may be explained by the number of underpayment penalties associated with final tax returns. Income tax collection amounts in January are second only to the month of April for most states. For the seven months through January 2019, the year-to-date growth rate for personal income taxes dropped to 0.6 percent. This was taking place as governors were submitting their proposed budgets and legislatures were convening their 2019 sessions. Revenue estimators expressed uncertainty but some expectation that taxpayers that make estimated payments would reckon their tax liability with higher payments with their April filed returns.

That is what appears to be happening in April. The surge in April receipts is primarily caused by much higher final payments made with tax returns. Thirty-seven states have reported April tax collections; the year-to-date growth rate for that group has nearly recovered to November levels.

Income Tax Revenues Recovered to Exceed Most Fiscal Year 2019 Revenue Estimates
The updated fiscal year 2019 state revenue forecasts for personal income tax revenues call for an average growth rate of 3.2 percent. The resurgence of April tax collections will not only recover the declines earlier in the year but are expected in many states to exceed the updated estimates. NASBO’s upcoming Spring 2019 Fiscal Survey of States will provide state-by-state detail of the revenue estimates used to support the budget recommendations that governors made earlier this year.

Caution Suggested with Volatile Income Tax Revenues

One of the most cited reasons for higher income tax revenue collections in states is increases from non-wage income (capital gains, dividends, etc.). Payroll withholding remains the largest component of state personal income tax revenues. Non-wage income is much more volatile, as it tracks more closely with capital gains income, and is therefore challenging to predict. The forecasting error is larger with this volatile source of income. To that end, states will strive to determine the portions of these higher receipts that are attributable to recurring or non-recurring activity. California’s updated May 2019 revenue estimate states that while high-income individuals outperformed their earlier expectations, “…the boost is expected to be temporary and revenues will be lower beyond the forecast window.”