States Are Seeing Steep Income Tax Revenue Growth. Will It Last?

Photo credit: Getty Creative

getty

The states totaled nearly $ 455 billion in income tax receipts in fiscal 2021 – a staggering 14.7% year-over-year increase. That’s according to the latest report from the National Association of State Budget Officers (NASBO), which covers spending through June 2021. Income tax receipts have increased 15% over two years.

However, these numbers are heavily influenced by unusual economic times. For starters, states delayed their tax filing deadlines by several months when the pandemic started. For most, this has pushed their 2020 income tax receipts into the next fiscal year. This artificially deflated the 2020 numbers while inflating the 2021 collections.

The federal impulse also played a role. As of March 2020, the Feds have paid households $ 867 billion in cash through three Economic Impact Payments. While these payments were not taxable, they could indirectly increase government tax liability for some. (The New York Times NYT has a good explanation of this.) Also, unemployment insurance – which most states tax – got a massive boost for about 15 months.

Finally there is the stock exchange. The S&P 500 is up more than 40% year over year and nearly 70% up three years ago. Most states tax capital gains at the same rate as normal income, and those with a high concentration of affluent people (e.g. California) benefit from the tax revenues of the bull market.

Other takeaways from the NASBO report:

• Total government general fund revenue increased by an estimated 12.8% in 2021
• Total government spending rose 16.2% in 2021, the highest annual jump in the 35-year history of the Government Expenditure report.
• In the past two fiscal years, states spent $ 427.9 billion on federal aid to COVID-19.

Will it take

The income tax boom has not yet slowed down. According to the latest analysis by Lucy Dadayan of the Urban Institute, 37 of the 43 said that between April and September of this year, the taxable income of this income rose steadily. Eleven of these states recorded growth of more than 20%. Utah, for example, is forecasting income tax revenues of $ 5.7 billion for the current fiscal year. That is a third more than in 2019 (not adjusted for inflation).

However, the budget projections anticipate a slowdown in income tax revenue growth in the end. Most states are forecasting strong growth for the remainder of the fiscal year, but these reports contain warnings for the years to come.

For example, the Utah Economic Impact Report states that “a decline in personal income in the national labor market is likely”. The extent will depend on whether the economy adjusts to pre-pandemic trends or whether another wave of the virus forces the labor market to shrink.

The Omicron variant of the virus has not been reported in the US, but economists are concerned about the potential impact. However, according to NASBO, “high earners are relatively shielded from the economic impact of the COVID-19 pandemic, which has limited impact on income tax collection.”

https://www.forbes.com/sites/lizfarmer/2021/12/01/states-are-seeing-steep-income-tax-revenue-growth-will-it-last/