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

State and local government tax revenues continued modest growth in the third quarter of 2017

 

Albany, NY — The Rockefeller Institute of Government’s latest State Revenue Report shows that state and local government tax revenues continued modest growth in the third quarter of 2017, with combined tax revenues from major sources up 3.5 percent from the 2.7 percent average growth in the four previous quarters.

Early data for the fourth quarter of 2017 begin to show the effects of the passage of the Tax Cuts and Jobs Act (TCJA), with the strongest growth in state tax revenues in the post-Great Recession period. The strong growth is partially attributable to the new tax law creating incentives for some high-income taxpayers to prepay state and local taxes before certain tax breaks expire — particularly the state and local tax (SALT) deduction, which is now capped at $10,000 per year.

“We’re beginning to see the early effects of President Trump’s Tax Cuts and Jobs Act in the tax revenue data, especially as high-income taxpayers take advantage of the state and local tax deduction before it’s capped at $10,000,” said Jim Malatras, president of the Rockefeller Institute. “And we expect more fluctuations as states figure out how to mitigate the law’s impact. Our quarterly analyses of state and local tax revenue will continue to be an important tool for sensing how these changes ripple through the economy.”

Findings from the report include:

  • Total state government tax revenue from all sources increased 3.1 percent in the third quarter of 2017, exceeding the average quarterly growth rate of 2.1 percent for the previous four quarters. This was 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.
  • Local government tax revenue from major sources increased by 4.1 percent, up from 3.2 percent average growth in the prior four quarters, driven largely by 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 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.
  • 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.
  • 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.

Weaker growth in state tax revenues in the first quarter of 2018 and declines in the second quarter of 2018 are likely as states and taxpayers adjust to the TCJA. One thing is for sure: state and local governments face large fiscal uncertainties and state forecasters are struggling to sort out various impacts of the TCJA on state tax revenues.

The report was written by Rockefeller Institute Senior Policy Analyst Lucy Dadayan.

Read the full report.