Analysis: State income up in April, but may not be enough

(Reuters) - Personal income tax collections in states in April might have grown an average of more than 7 percent, but for some the increase may not be enough to ease budget crises.

Reuters found that the average increase of personal income tax collections in April 2012 from April 2011 for the 20 states for which data is available was 7.3 percent.

A handful of states that were lulled into a false sense of security from last year's surge in collections, when the average April increase was 18.5 percent, are now wondering if revenue is growing enough to cover their spending plans.

In New Jersey, income tax collections, the state's largest revenue source, slipped 1.2 percent from April last year to $1.75 billion, according to the governor's office. That was also 2.8 percent below forecast. The Office of Legislative Services warned the decline "further eroded the overall revenue situation with less than three months remaining in fiscal 2012."

Most states end fiscal 2012 on June 30 and all except Vermont must have balanced budgets. During the Great Recession, they were often caught by surprise with sudden declines in taxes that forced them to make emergency spending cuts and temporarily hike taxes. Income taxes, which make up about one-third of state tax collections, were particularly hard hit as unemployment rates climbed.

April is typically a big revenue month for the 41 states with personal income taxes: wage earners face a mid-month deadline to report and pay tax liabilities incurred in the previous year. And in April 2011, states saw a sharp reversal in fortune, with some reporting growth in individual tax collections of more than 25 percent from the year before.

This year, the growth continued, but for many states it was not as robust. The range for April collections was wide, with Indiana having the biggest increase at 44.9 percent and Rhode Island the steepest decline of 13.4 percent.

In the first four months of 2012, personal income tax collections grew by 5.8 percent from the comparable period in 2011 in the 19 states for which data is available, said Lucy Dadayan, senior policy analyst for New York's Rockefeller Institute, which monitors states' fiscal health.

Now, though, some of the supports for their revenues, which included money from the 2009 federal stimulus plan, have ended, and the job gains that marked the beginning of the year are threatening to fizzle.

"We won't expect this growth to continue in coming months because of the expiration of federal aid to states and because employment growth has been slow across the nation. And the temporary tax increases have expired. States should not expect the large growth they experienced in 2011 in general," said Dadayan.

RISING COLLECTIONS STILL COMING IN LOW

California's collections inched up 1.7 percent to $7.17 billion, but that was far short of the $9.13 billion forecast in Governor Jerry Brown's budget plan. Projections for the gap in next year's budget now stand at $15.7 billion.

Likewise, Pennsylvania's income tax collections were up 8.3 percent last month to $1.7 billion and were also $26.4 million below forecast, the state's revenue department reported.

The discrepancy springs from some states counting on last year's burst of collections continuing into this year, said Kim Reuben, a senior fellow at the Urban Institute, which is compiling a report on revenues.

Reuben believes last year's "blip" was partly due to investors who, worried that tax cuts enacted under President George W. Bush would expire, decided to pay capital gain taxes in 2010 in order to ensure they were charged the lower rates.

"It turned out it was this non-wage growth, and that's not being sustained," she said. "But some states - California was the worst offender of this - built in that increase of income tax revenues into the bases of their forecasts."

Brown has proposed cutting $8.3 billion in spending and finding $8.5 billion in new revenue.

"For most states, their budgets are reasonable because they were more conservative," said Reuben. "They're not seeing new gaps."

NOT ALL ECONOMICS

The 10.3 percent jump in Oklahoma's income taxes, fueled by a relatively low jobless rate, counter-balanced five months of slumping gross production taxes on oil and natural gas.

In other states, factors beyond the economy influenced collections. Rhode Island overhauled its tax system and brought in $22 million less this April than last year.

New York collected 7.3 percent less, for a total of $5.13 billion. The drop could have been steeper, but lawmakers decided in December to lower rates for the wealthiest New Yorkers less than planned after the end of a three-year surcharge.

Ohio in April took in $1.29 billion in income taxes, surpassing estimates by 6.7 percent but lagging April 2011's total by 8.3 percent, according to its budget office. The lower revenue was due to the final step of a phased-in rate cut.

Much of the reason for the 31.6 percent increase in Illinois was a 67 percent hike in the personal income tax rate approved in January 2011, according to the legislature's Commission on Government Forecasting and Accountability.

In Indiana and Alabama modifications to the administration of tax payments helped create big jumps.

"Part of the increase can be attributed to an improving economy and part is likely due to the timing of the payments," said Carla Snellgrove, spokeswoman for Alabama's revenue department, adding it processed return checks "a little faster."

Seven states - Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming - collect no personal income tax, while two, New Hampshire and Tennessee, only tax dividends and interest income.

The slowing growth worries officials that their states will not be strong enough to fight off threats both domestic, such as unemployment, and international - namely Europe's turmoil.

"We talk about how states went from the Great Recession to the 'Great Uncertainty,'" said Arturo Perez, who tracks fiscal issues for the National Conference of State Legislatures.

(Additional reporting by Michael Connor in Miami, Jim Christie in San Francisco, Hilary Russ and Joan Gralla in New York; Editing by Tiziana Barghini and Kenneth Barry)

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