Tax day is fun for two groups of people: accountants who end a hectic busy season, and state governments that rely on tax dollars to fund necessary operations. But this year, states across the country are noticing a disturbing drop in tax revenue for the first time since the end of the Great Recession -- thanks, in large part, to a hangover from the 2012-2013 fiscal cliff.
Total personal income tax revenue fell by 0.4 percentage points in the first quarter of 2014, according to data compiled by the Rockefeller Institute, the first year-over-year decline since the last three months of 2009. Corporate tax revenues declined in 20 states, while personal income tax revenues fell in 10 states.
The declines don't come as a total shock, budget analysts in those states say. Some come as a result of state tax cuts passed by legislatures last year. Others are blamed on bad weather that froze much of the country this winter. But the bulk of the decline comes from two particular events at the federal level: The fiscal cliff, narrowly averted in the first days of 2013, and the Affordable Care Act -- both of which created a spike in tax revenues in early 2013.
A series of negotiated deals over the federal debt ceiling and extending tax cuts first passed under President George W. Bush set a daunting deadline for members of Congress just after the 2012 elections: The tax cuts, spending cuts known as budget sequestration and other key tax laws all faced a New Year's Day deadline. Congress avoided going over the cliff, which would have meant higher taxes and steep spending cuts that economists warned would have sent the economy into a recession, in late-night votes on Jan. 1, 2013.
But the partisan gridlock built up before and after the 2012 elections gave money managers, corporations and high-income earners reason to be skeptical. Many businesses and individuals took income or sold stock in the last weeks of 2012 that would otherwise have been realized the following year, in order to avoid higher tax rates. A 3.8 percent surcharge on investment income on taxpayers who made more than $250,000 a year, imposed by the Affordable Care Act, also inspired wealthy investors to cash out before the beginning of 2013.
Taxes on that income, taken in late 2012, would hit state coffers in the first half of 2013, when taxpayers filed their returns. Indeed, states reaped huge windfalls in the first and second quarters of last year, when personal income tax revenue soared 18 percent over the prior year and corporate income taxes rose about 10 percent.
The windfall states experienced in 2013 meant that revenue wouldn't roll in to state coffers the following year, in 2014. On their face, the numbers are startling: In the first three months of the year, personal income tax revenue dropped 15.3 percent in Maine, 4.1 percent in Iowa, and 3.7 percent in both Mississippi and South Carolina.
But because of unexpectedly strong growth in 2013, the declines in 2014 represented more of a return to the norm than any factors worthy of concern.
California had a particularly precipitous drop, thanks to another factor: Wealthy investors who sold stock in 2012 had to pay extra in taxes after a voter-approved initiative boosted capital gains taxes retroactively. That meant California collected even more capital gains taxes in early 2013, when those 2012 taxes came due, than it would have otherwise.
Some states saw tax revenues fall after implementing new tax cuts. Ohio Gov. John Kasich signed personal and small-business tax cuts into law last year; this year, personal income tax revenue collected in the first quarter fell 19.3 percent and corporate income tax fell 91.6 percent over 2013 levels.
North Dakota, which also cut income taxes, saw personal income tax revenue decline by 19.1 percent.