SALT, stock drop leaves states with first tax decline since 2016

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The main tax revenue for U.S. states declined by an average of almost 2 percent during the last three months of 2018 from the same quarter a year earlier, according to preliminary data from the Urban Institute, marking the first drop since the second quarter of 2016.

Personal income tax revenue declined 9.4 percent, in part because collections were artificially boosted a year earlier when residents paid their taxes early before limits of state and local tax deductions took effect. Wild swings in the stock market throughout the fourth quarter likely also contributed to the drop, according to Lucy Dadayan, a senior research associate at the Urban Institute.

The steeper-than-expected drop threatens to leave some states facing budget shortfalls in the current fiscal year, which ends in June for most governments.

"Revenue forecasters had factored in the impact of the Tax Cuts and Jobs Act, but the magnitude of decline is really much larger than expected," Dadayan said, adding that she expects to see some growth in April but not enough to make up for the losses in December primarily because of the stock market sell-off, government shutdown and uncertainty related to tariffs.

States reliant on high-income taxpayers were hit the hardest. New York’s personal income-tax revenue declined 25.2 percent in the fourth quarter from the same quarter of 2017 while its overall tax revenue declined 14.7 percent. California’s personal income-tax revenue declined 17 percent while overall revenue declined 14.5 percent.

In the third quarter of 2018, state income, sales and corporate taxes increased 8.2 percent from the same quarter in 2017, according to the Urban Institute.

Bloomberg News
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