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Taxpayers Cashing Relief Checks From Unexpected State Bounties

Feb. 18, 2021, 9:46 AM

States from California to Maryland are using revenue coming in higher than expected in this Covid economy to fuel their own relief efforts in the absence of more federal aid.

Total tax revenue collected across the 50 states was down 1.8% from March through December 2020 compared to the same period in 2019, according to Tax Policy Center data, but even as pandemic pain struck jobs and Main Streets, many states collected more taxes than they anticipated at the onset of the outbreak.

Some of those states want to use the unexpected money for future tax relief or to help people and businesses still struggling.

“Now that some governors realize they are not drowning, they are trying to get as much relief to those who have just been absolutely destroyed by the pandemic,” said Richard Auxier, a senior policy associate at the Tax Policy Center.

Twenty-one states reported revenue increases from March to December 2020 compared with the same period in 2019, and many more reaped significantly more than they had projected last spring, when Covid-19 began ravaging businesses large and small. At that time, officials projected drastic falloffs in revenue that didn’t fully materialize several months later.

Some of these states even have enough to consider relief funding and tax cuts, thanks to spending restraint, federal stimulus money, and taxes from the online sales boom—not to mention the fact that income tax collections, received months later than usual because of delayed tax deadlines, were based on pre-virus incomes.

“We saw good tax collections last year because they were mostly taxes from the previous year, which went unaffected,” said Ulrik Boesen, senior policy analyst at the Tax Foundation. He also said some local government coffers are actually fuller, as property taxes, their main source of revenue, have been relatively unaffected so far.

The healthy tax hauls may not continue, though, as the coronavirus damage works its way through the system, affecting taxes due on 2020 income as well as property assessments.

And even though things are less dire than projected, total state tax collections across the 50 states were still down $37.4 billion through the first three quarters of 2020 from a year before—a 4.4% drop, according to US Census Bureau data compiled by the Tax Foundation.

“It is important to remember revenue is not better than expected before coronavirus,” said Auxier. “It is better than expected at the outset, when we had no idea what the hell was going on. Every major policy goal before the pandemic is still sidelined.”

States like California and Arizona with progressive income tax structures are staying afloat, while states that rely on tax revenue from tourism or energy production—Alaska, North Dakota, and Florida, for example—aren’t doing as well, said Brian Sigritz, director of state and fiscal studies for the National Association of State Budget Officers.

Federal stimulus checks, enhanced unemployment benefits, Paycheck Protection Program loans, and stronger-than-expected sales tax revenue are also helping states stay fiscally healthy, he said.

“We’re still seeing declines but they’re not as bad as first anticipated,” Sigritz said.

Some states with strong pandemic-era revenues may use them to offer tax cuts to attract businesses and a newly mobile population. Still, many states that are holding their own right now are expecting deficits to resurface within a few years, he said.

Savings for Stimulus

In Maryland, officials now expect a $921 million drop in revenue over the next two fiscal years, about $3.8 billion less than financial reports projected in April.

“Our state economy didn’t experience the drastic downturn expected by leading national economists, and we now face deficits that pale in comparison to the initial doomsday predictions,” Gov. Larry Hogan (R) said in a Jan. 19 budget letter to legislative leadership in which he announced payments of up to $600 for low-income individuals and $900 for families.

The state began sending the first round of stimulus checks Tuesday after Hogan signed off on his budget following passage in the state legislature.

California went well beyond reversing its mid-2020 projection of a $54 billion deficit: It has a $15 billion surplus instead. Gov. Gavin Newsom wants to spend some of that surplus on economic recovery, including $600 checks for low-income residents and expanded tax credits and grants for businesses that hire workers and expand in the state.

“We are in a much better fiscal footing than anyone could have imagined even a few months ago,” the Democratic governor said when he released his proposals Jan. 8. “We’re investing in utilizing resources from this surplus to help support the most vulnerable Californians.”

California’s win is the product of its progressive income tax structure that depends heavily on taxes on high incomes and capital gains. But Newsom isn’t willing to go further down that road with proposals some lawmakers are offering to increase taxes on the wealthy, who continue to do well during the pandemic.

“They’re just not part of the conversation,” Newsom said of such measures.

Tax Cuts

Ten states—Idaho, Arkansas, and Illinois among them—even collected more taxes through the first three quarters of 2020 than they did through the first three quarters of 2019.

Idaho, which led the pack, saw its general fund 12.2% higher through September compared with a year earlier. In his recent State of the State address, Gov. Brad Little (R) seized on the higher revenue in proposing more than $450 million in combined property and income tax relief, which he said would be the “single largest tax cuts in Idaho history.”

“While other states face potential budget cuts of 20- to 40% and more, Idaho is in the enviable position of having a record budget surplus,” Little said.

Arkansas, which also saw more revenue through the first three quarters, is poised for big tax cuts as well.

Its gross revenue was up 6.4% for fiscal year 2020 through September compared with the same period in 2019. Six months into its fiscal year, Arkansas also exceeded revenue forecasts by more than $300 million, according to Gov. Asa Hutchinson (R).

His budget calls for $50 million in tax cuts, including breaks for new residents, lower sales taxes on affordable vehicles, and general cuts for the working and middle class.

Arizona is anticipating a $352 million surplus when its fiscal year concludes at the end of June, a stark contrast to the $1.1 billion deficit it expected last April.

Not only is Arizona Gov. Doug Ducey (R) promising no tax hikes, he is calling for tax cuts to stimulate the economy and attract more residents fleeing high-tax states like California—which saw its first population decline ever recorded last year.

Ducey’s $12.6 billion spending plan calls for a $1.2 billion income tax cut for individuals and small businesses spread out over the next three years, starting with $200 million this year.

In some states, strong revenues are softening long-term budget woes. Illinois Gov. J.B. Pritzker said the state’s chronic deficit has fallen from $5.5 billion to $3 billion, allowing him to propose holding spending flat and avoiding new taxes but not to offer tax cuts or other relief.

Connecticut, too, has a surplus—$70 million as of mid-January—instead of the $1.9 billion deficit the comptroller projected in October. Republican Gov. Ned Lamont isn’t proposing Newsom-like relief measures, but he also isn’t endorsing Democrats’ calls for higher taxes on wealth and capital gains to pay for the state’s own stimulus checks for low earners.

Lamont’s position would have been a lot harder to hold on to a few months ago, before revised revenue projections came out, Auxier said.

In his Feb. 10 budget address Lamont mentioned balancing the state’s finances without tax increases four times. He did not however mention stimulus checks.

All the states, regardless of their current tax collections, face a similar budgeting dilemma: as the pandemic persists, forecasting even short-term economic impact will be difficult, said Lucy Dadayan, a senior research associate at the Tax Policy Center.

“We have to realize that we are living in a new reality” Dadayan said, “and there are just too many unknowns.”

To contact the reporters on this story: Sam McQuillan in Washington at smcquillan@bloomberglaw.com; Laura Mahoney in Sacramento, Calif. at lmahoney@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergindustry.com; Kathy Larsen at klarsen@bloombergtax.com

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