Report: Prepayments in December Boost State and Local Tax Revenues in Fourth Quarter of 2017

High-Income Taxpayers Rushed to Take Advantage of Expiring Tax Breaks after Passage of the Federal Tax Cuts and Jobs Act 

State and Local Revenue Likely to Continue to Fluctuate as Taxpayers and States Adjust to TCJA

 

Albany, NY — State and local government tax revenues in the fourth quarter of 2017 showed robust growth, driven largely by a boost in state personal income and local property tax revenue as high-income taxpayers prepaid in order to take advantage of expiring tax breaks after the passage of the federal Tax Cuts and Jobs Act (TCJA), according to a new report by the Rockefeller Institute of Government.

The report, “Robust State and Local Revenue Growth in the Fourth Quarter of 2017; Federal Tax Cuts Cloud Horizon,” finds that all major sources of state government tax revenues increased in the fourth quarter of 2017, though they varied significantly by source. Personal income tax revenues showed double-digit growth; sales tax revenues increased more than in the three previous quarters of 2017, but trailed behind the growth in other major tax revenue sources; and local government property taxes showed the strongest growth in nine years.
 
“We’re seeing very strong tax revenue growth at the end of 2017, far exceeding the moderate average growth rates of recent years,” said Rockefeller Institute President Jim Malatras. “We will be closely monitoring whether that growth continues or is a temporary result of taxpayers prepaying before certain tax breaks expire under the federal Tax Cuts and Jobs Act.”
 
Specific findings include:
  • Total state government tax revenue from all sources increased 9.4 percent, exceeding the average quarterly growth rate of 2.7 percent for the previous four quarters.
  • Local government tax revenue from major sources increased 8.9 percent, substantially higher than the 3.5 percent average growth in the previous four quarters.
  • Preliminary data for January and February 2018 combined indicate double-digit growth in personal income taxes and single-digit growth in sales tax collections.
The passage of the TCJA and accompanying behavioral responses, as well as a pending Supreme Court case related to online sales taxation, make for a high level of fiscal uncertainty for states in the remainder of the fiscal year 2018 and the upcoming fiscal year 2019.
 
The report was prepared by Rockefeller Institute Senior Policy Analyst Lucy Dadayan.
 
 
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