Individual Income Tax Insights: States Have Their Mind on Their Money and Their Money on Their Mind

A Rockefeller Institute Report projects slowed revenue growth for states in 2016.  This situation leaves many to speculate, scrutinize and analyze the causes and changes, if any, to tax policy or government spending that have caused weak tax revenue growth. 

Key individual income tax takeaways from the Rockefeller Institute Report include the following: 

  • Individual income tax revenues slowed in the third quarter of 2015 to 6.5 percent growth from 14.4 percent growth in the same quarter. 
  • Nine states showed declines in individual income tax collections. 
  • In 28 states, at least a third of a state’s revenue is comprised of individual income tax. 
  • In 26 states, individual income tax collections surpassed sales tax collections. 

The individual income tax revenue decline is attributed to a weak stock market and tax legislation changes according to The Rockefeller Institute Report.  A weak stock market results in lower tax collections for those states that rely on capital gains income.  For example, Connecticut and New York tax revenues from high net worth individuals comprise 33 to 41 percent of the states’ individual income tax collections, reported The Pew Charitable Trusts.  It’s likely that high income individuals have passive income fluctuations that will affect state coffers.  Thus, “taxing the incomes of the rich means living with unstable budgets,” according to The Pew Charitable Trusts.  

Legislative changes also led to the decrease in state revenues, reports the Governing Daily.  North Dakota and Illinois reported the largest double digit declines most likely due to income tax rate decreases.  In 2015, California implemented the earned income tax credit which is estimated to cost the state $380 million.  Despite the poor outlook, states across the country continue to issue 2016 proposals to reduce individual income taxes.  Such tax cutting measures are unlikely to disappear as they are popular among constituents.  

Currently several states, including Alaska and Kansas, are still trying to figure out how to balance their budget given revenue shortfalls.  Last year, Alaska’s governor proposed the implementation of an individual income tax in the state.  Kansas’ February collections resulted in a budget shortfall of $50 million.  Governor Sam Brownback has vowed not to increase taxes; instead, his “focus is on managing spending,” reported Fox4KC.  

Given this report, it’s surprising Indiana brought in $45 million dollars in revenue more than expected last month that is solely attributed to the strength of individual income tax collections of $65 million, reports Indiana Public Media.  Similarly, Maine has a $72.7 million surplus, reports the Portland Press Herald.  

The poor outlook for state revenues has many wondering how the states will adjust to fill budget gaps and shortfalls.  These driving forces will play out in state legislation coming out this legislative season.  Grab the popcorn. 

Continue the discussion on Bloomberg BNA's State Tax Group on LinkedIn:  How should states make up for revenue shortfalls? 

For more information about individual income taxes, check out Bloomberg BNA’s Individual Income Tax Navigator by signing up for a free trial of the Bloomberg BNA Premier State Tax Library today.