News Release - Federal Income Tax Collections Foretell More Bad News for States

NEWS

For Immediate Release –

May 4, 2010

Media contact: Claire Hughes – (518) 443-5744 / communications@rockinst.org

Federal Income Tax Collections Foretell More Bad News for States

Rockefeller Institute fiscal policy experts see troubling indicator in federal data through end of April

Albany, N.Y. — A decline in personal income tax revenues collected by the federal government through the end of April 2010 suggests that state governments may suffer significant declines in such tax collections compared to 2009, a period which itself was down dramatically from the year before, according to Rockefeller Institute fiscal experts.

The weeks just after the April 15 filing deadline for income-tax returns is the most important tax-collection period of the year for most states, and particularly those that rely heavily on income taxes. The Institute’s fiscal policy analysts have been watching daily federal data on nonwithheld taxes processed in April, as an indicator of what state governments around the country are likely to expect in terms of revenues compared to last year. Through April 30, the federal government’s nonwithheld income taxes are down 17.6 percent from a year earlier. That is likely a close estimate to the final decline the Internal Revenue Service will see in nonwithheld income tax collections in this period; in 2009, 96 percent of April and May's nonwithheld taxes were known by April 30.

“We have been watching this data closely since our last report, when we discussed this issue,” said Institute Senior Fellow Donald J. Boyd. “With the data now in hand, it’s all over but the crying.

“There weren't any major changes in federal tax law that would have caused this revenue drop,” Boyd said. “And it is a pretty good indication that states, too, will have large year-over-year declines in April tax payments (before accounting for any tax increases they may have enacted).”

In the Institute’s last State Revenue Report, released April 16, Boyd and co-author Lucy Dadayan predicted states were likely facing a significant decline in income tax payments for 2009 this April and May, despite the large decline that already occurred on 2008 income tax payments a year ago and despite signs that the current economy is beginning to recover.

As the Rockefeller Institute researchers pointed out, news of significant revenue declines in late April and early May can strain what is already a complicated political process for states across the country.

“A significant shortfall or overage announced in May — when budget negotiations are down to their last few weeks and the time to develop and negotiate proposals is short — further complicates already complex political dynamics and can make it difficult to close any new budget gaps that arise,” Boyd and Dadayan wrote in the April 16 report.

It’s still too early to tell the exent to which these year-over-year declines will translate into a revenue shortfall for states, and how much the numbers differ from states’ own fiscal forecasts, Boyd said. But federal income tax collections through April make it clear that good news from income tax returns is not on the horizon for states that have already suffered revenue declines for a record five consecutive quarters, he said.

“At a minimum, the federal data tell us that states are not likely to get bailed out by good news in April, and that some will find that they face new shortfalls,” Boyd said.

The Institute will issue its next report on state tax revenues, including the important April income-tax collections, in the coming weeks.

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About the Rockefeller Institute of Government

The Nelson A. Rockefeller Institute of Government, at the University at Albany, is the public policy research arm of the State University of New York. The Institute conducts fiscal and programmatic research on American state and local governments. Journalists can find useful information on the Newsroom page of the Web site, www.rockinst.org.

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