State tax revenues topped $1 trillion for the first time in the 2018 fiscal year, according to a preliminary analysis by the Urban-Brookings Tax Policy Center. Much of the growth in revenues during the year, which ended on June 30 in most states, came from individual tax receipts. But TPC’s Lucy Dadayan says that the good times for states may not last – due in large part to one-time effects created by the Republican tax bill signed into law a year ago.
Tax revenues may have been especially volatile this year due to payment shifts made by high-income taxpayers, Dadayan writes. Here are some of the dynamics at play:
“For example, it is likely that their expectation of a major tax cut in calendar year 2017 encouraged some investors to delay capital gains realizations from tax year 2016 into 2017. Once Congress passed the [Tax Cuts and Jobs Act] in December 2017, some high-income taxpayers likely accelerated asset sales they otherwise may have made in 2018. That way, they could still fully deduct from taxable income their state and local taxes imposed on these sales before the deduction was capped by the TCJA. In addition, some taxpayers also accelerated payments of other state and local taxes, such as property taxes and estimated income taxes, into calendar year 2017.”
There are other factors involved in the growth of state tax revenues, including strong economic growth, fluctuation in corporate tax payments and new online sales taxes in the wake of the Wayfair ruling by the Supreme Court. But overall, Dadayan warns that states should be prepared for a slowdown in revenue growth in the coming quarters: “As a result of this post-TCJA uncertainty, especially as it applies to the individual income tax, state officials would be wise to view recent revenue increases as a one-time windfall and anticipate slower revenue growth in the medium term.”
A report on state budget practices by the Volcker Alliance last week highlights the need for states to continue to take their fiscal challenges seriously. The report warns that despite the economic boom, “many states still struggle to balance budgets in the face of mounting obligations for health care, infrastructure, education, and public employee retirement costs.”