Revenues Likely to Fluctuate Due to the Passage of the Federal Tax Cuts and Jobs Act and as States Explore Ways to Mitigate Its Impact

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Author
Lucy Dadayan

Summary

State and local government tax revenues continued modest growth in the third quarter of calendar year 2017. Preliminary data for the fourth quarter of calendar year 2017 show the strongest growth in state tax revenues in the post-Great Recession period. The strong growth in state tax revenues in the final quarter of 2017 may only be temporary given that it is partially attributable to the passage of the Tax Cuts and Jobs Act (TCJA). The TCJA created incentives for some high-income taxpayers to act fast and prepay their state and local taxes to take advantage of the expiring tax breaks, namely the state and local tax (SALT) deduction, which is now capped at $10,000 per year. State and local tax revenues will likely continue to fluctuate in the coming quarters as some high-income states look for ways to mitigate the impact of the TCJA on their resident taxpayers, and some high-income taxpayers explore loopholes and adjust their financial behavior in light of the new provisions of the TCJA.

All major sources of state government tax revenues saw growth in the third quarter of 2017. Personal income tax revenues showed solid increases, while sales tax revenues continued sluggish growth, trailing behind the growth in other major tax revenue sources. State sales tax revenues also lagged behind rates of increases in previous economic expansions. Local government property taxes showed continuous growth, though their rate of increase slowed from recent trends.

Specific findings include the following:

  • State Government Revenue. Total state government tax revenue from all sources increased 3.1 percent in the third quarter of 2017, a rate exceeding the average quarterly growth rate of 2.1 percent for the previous four quarters, driven mostly by higher personal income tax revenues, which increased 4.3 percent compared to an average quarterly rate of 2.8 percent for the previous four quarters. Growth in sales tax collections in the third quarter was weaker, at 1.4 percent, compared to its average quarterly rate of 2.3 percent for the previous four quarters.
  • Local Government Revenue. Local government tax revenue from major sources increased in the third quarter of 2017 by 4.1 percent, an improvement from the 3.2 percent average growth in the prior four quarters. The stronger growth in local government tax revenues resulted largely from a strong quarterly growth in local sales tax revenues (6.8 percent). The largest single source of local government revenues, property taxes, increased 3.7 percent in the third quarter, a slight slowdown compared to the 3.9 percent average increase in the prior four quarters.
  • State and Local Government Revenue. Using the latest data available, state and local government revenue from major taxes increased 3.5 percent in the third quarter of 2017 compared to a year earlier, which is stronger than the 2.7 percent average growth for the four previous quarters (see Table 1).
  • Preliminary Data for the Fourth Quarter of 2017. Preliminary state government tax data for the fourth quarter indicate double-digit growth in personal income taxes at 16.6 percent and relatively strong growth in sales tax collections at 6.9 percent. Overall, state tax revenues grew 12.2 percent in the October-December of 2017 compared to the same quarter in 2016. The Rockefeller Institute has closely monitored estimated and final payments for income taxes, and these data show strong growth in both types of payments for the fourth quarter of 2017, most likely attributable to taxpayer responses to the TCJA.
  • Significant Regional Variation. State tax collections continued to show large regional variations. Most of the states west of the Mississippi River reported stronger growth in the third quarter of 2017, while states east of the river had weaker growth or even declines — a pattern we also saw in the previous two quarters. Overall, fewer states saw revenue declines throughout 2017, compared to revenue declines observed throughout 2016, which were widespread and were both on the east and west side of the Mississippi River.

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