Good news for state budgets: State personal income tax collections grew 17.6 per cent in the first quarter of 2013, compared to the same period a year earlier. That’s the strongest growth in over six years, according to a new report from the Rockefeller Institute of Government at SUNY-Albany.
This is going to take pressure off state budgets. But there are two big caveats.
First, the national rise is heavily driven by a huge income tax increase that California implemented in January. California’s personal income tax receipts soared 52 per cent (which is why California now has a budget surplus); for the rest of the country, receipts were up 9 per cent, which is still strong but not as eye-popping.
Second, some of the big drivers of the national strength were temporary. Federal income tax increases for 2013 encouraged wealthy people to shift their income into 2012, for example by realising capital gains. This boosted both state and federal tax revenues for the last two quarters and will likely do so again for the current quarter — but not forever.
The story is similar at the federal level. A one-time boost in tax receipts helped push the federal budget deficit way down for 2013, but the improvement expected in future years is much more modest. Similarly, states should be mindful that part of this revenue boost won’t last forever, and they shouldn’t make new long-term spending commitments based on it.
Even with all those caveats, these tax data do provide promising signs that the economy is improving. Sales tax receipts were strong in the second quarter, too, up 6 per cent — tied for the strongest growth in the last six years.
Unlike the income tax change, the boost in sales tax collections was not significantly driven by changes in tax rates or other one-time factors; it’s a bona fide indicator that consumers are spending more, and that government finances are likely to continue getting healthier.
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