Can States and Cities Dig Themselves Out?

Link: https://www.city-journal.org/multimedia/can-states-and-cities-dig-themselves-out

Excerpt:

David Schleicher: Yeah, absolutely. There’s an old joke that says, “The federal government is an insurance company with an army.” But anything you actually touch, can physically touch, any infrastructure of any sort, or services you consume and need to care about in one way or another are almost all directly provided by the state and local governments. They’re often funded sometimes with money from the federal government, but they are directly private and partially funded by state and local governments. The fiscal health of state and local governments is extremely important to, say, the question of state capacity in America.

Allison Schrager: It seems like we don’t talk about it until you’re Illinois or if you’re a municipality, Detroit, but it seems like we’ve been talking about this big shoe to drop on state municipal bankruptcies for a while and it doesn’t come, but that doesn’t mean we should be complacent.

David Schleicher: Yeah, absolutely. Two things. One is that it definitely would’ve come in the last couple of years had the federal government not dropped a ton of money on state and local governments. The pandemic created huge fiscal problems for a number of jurisdictions. The federal government responded by providing a huge amount of aid. The effect of that is that has had benefits and costs, which I’m sure we’ll talk about, but you can’t just look through the defaults or absence of defaults, to ask the question of “Are states and cities in fiscal trouble?” State and fiscal budgets are very procyclical. We end up cutting really important things during recessions and spending too much during non-recessions. Then we have the question of federal bailouts.

Allison Schrager: Yeah, it’s a very complicated issue, so what to do about this. But you have a very sort of organized, clean way to think about it. You describe it as this trilemma.

David Schleicher: Yeah. When a state or city faces a fiscal problem, fiscal crisis, take New York City in the 1970s or Detroit, or Puerto Rico or whatever it is. We’ve had, over the course of American history from Hamilton’s assumption of state debts, we’ve had a series of state and local fiscal crises. We have a lot of governments and some of them are going to have crises. The question is, what should the federal government do? Well, the federal government has three things it would like to achieve, which are, it doesn’t want to have too severe cuts during recessions, because that creates even bigger recessions. It doesn’t want to encourage state and local governments to think that the federal government will always stand behind them, a problem we call moral hazard. It wants federal state and local governments to be able to continue to borrow because state and local governments need to borrow to build infrastructure.

Author(s): David N. Schleicher, Allison Schrager

Publication Date: 2 Jun 2023

Publication Site: City Journal

Wall Street Boosts States’ Credit Scores as Recession Worries Cloud Outlook

Link: https://www.bloomberg.com/news/articles/2023-04-19/wall-street-boosts-states-credit-scores-as-recession-woes-cloud-outlook

Graphic:

Excerpt:

Illinois, Massachusetts and New Jersey this year have garnered higher credit scores from rating companies, including brighter outlooks for the states as well. The upgrades also helped shrink bond yield spreads in the primary and secondary municipal markets, signaling investor perception of state debt is improving.

The better state ratings are due in part to the positive effect of federal pandemic aid, which some states used for one-time expenses while others set cash aside for the future. State treasuries also saw an influx of tax revenue from residents — bolstered by US stimulus money sent to individuals — who spent on services at home at the height of the pandemic, and on travel after Covid lockdowns were eased. 

Still, a slowdown in the US economy this year is causing concern that states can no longer expect a cash haul. The likelihood that the economy in the next 12 months will slide into a recession is greater now than a month earlier, according to a March 20-27 Bloomberg survey of 48 economists.

The poll, conducted after several bank closures roiled financial markets, put the odds of a contraction at 65%, up from 60% in February, amid interest-rate hikes by the Federal Reserve and growing risks of tighter credit conditions. 

Author(s): Skylar Woodhouse

Publication Date: 19 Apr 2023

Publication Site: Bloomberg

IRS Issues Clarification on Rebates, Says Illinois Taxpayers Can File Returns

Link: https://www.nbcchicago.com/news/local/irs-issues-clarification-on-rebates-says-illinois-taxpayers-can-file-returns/3070195/?utm_source=Wirepoints+Newsletter&utm_campaign=acdd8da238-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_895ee9abf9-acdd8da238-30506353#new_tab

Excerpt:

Millions of taxpayers were asked to delay filing their 2022 tax returns after questions arose over whether or not specific rebates should be included as taxable income, and now the Internal Revenue Service has given their answer.

The IRS said in a press release that “in the interest of sound tax administration,” residents in most states, including Illinois, will not be required to report rebates on their federal tax returns, and that filing of those returns can continue.

There were limited exceptions, including Alaska’s Permanent Fund Dividend, but for the most part all states that were included in the original notice will not require their taxpayers to report the rebates as income.

Illinois was included in a large group of states whose residents were advised to potentially delay filing their taxes after questions arose about the reporting of rebates given to taxpayers and property owners.

Those rebates, passed as part of the state’s fiscal year 2023 budget, were given to individuals who made less than $200,000, or couples who made less than $400,000. Those rebates returned $50 to each taxpayer.

Property tax rebates of up to $300 were also made available as part of the program.

Under the new IRS guidance, those payments are considered to be “general welfare” payouts, and therefore are not subject to federal income taxation.

Author(s): James Neveau

Publication Date: 12 Feb 2023

Publication Site: NBC Chicago

Nine States Began the Pandemic With Long-Term Deficits

Link: https://www.pewtrusts.org/en/research-and-analysis/articles/2022/12/16/nine-states-began-the-pandemic-with-long-term-deficits

Graphic:

Excerpt:

Twenty states recorded annual shortfalls in fiscal year 2020, when the coronavirus pandemic triggered a public health crisis, a two-month recession, and substantial volatility in states’ balance sheets. States can withstand periodic deficits, but long-running imbalances—such as those carried by nine states—can create an unsustainable fiscal situation by pushing off some past costs for operating government and providing services onto future taxpayers.

States are expected to balance their budgets every year. But that’s only part of the picture of how well revenue—composed predominantly of tax dollars and federal funds—matches spending across all state activities. A look beyond states’ budgets at their own financial reports provides a more comprehensive view of how public dollars are managed. In fiscal 2020, a historic plunge in tax revenue collections and a spike in spending demands were met with an initial influx of federal aid to combat the pandemic. The typical state’s total expenses and revenues grew faster than at any time since at least fiscal 2002, largely thanks to the unprecedented federal aid. But spending growth outpaced revenue growth in all but five states (Idaho, Maryland, Missouri, South Dakota, and Virginia). And 20 states recorded annual shortfalls—the most since 2010 and four times more than in fiscal 2019.

Despite the sudden increase in annual deficits, most states collected more than enough aggregate revenue to cover aggregate expenses over the long-term. But the nine states that had a 15-year deficit (New Jersey, Illinois, Connecticut, Hawaii, Massachusetts, Maryland, Kentucky, New York, and Delaware) —or a negative fiscal balance—carried forward deferred costs of past services, including debt and unfunded public employee retirement liabilities. Between 2006 and 2020, New Jersey accumulated the largest gap between its revenue and annual bills, taking in enough to cover just 91.9% of its expenses—the smallest percentage of any state. Meanwhile, Alaska collected 130.5%, yielding the largest surplus. The typical state’s revenue totaled 102.7% of its annual bills over the past 15 years.

Zooming out from a narrow focus on annual or biennial budgets—which may mask deficits as they allow for shifting the timing of when states receive cash or pay off bills to reach a balance—offers a big-picture look at whether state governments have lived within their means, or whether higher revenue or lower expenses may be necessary to bring a state into fiscal balance.

Author(s): Joanna Biernacka-Lievestro, Alexandre Fall

Publication Date: 16 Dec 2022

Publication Site: Pew

Report: Illinois overspending taxpayer money year after year

Link: https://www.thecentersquare.com/illinois/report-illinois-overspending-taxpayer-money-year-after-year/article_7bc5b8ba-8c84-11ed-a77d-a77c6a37c073.html?utm_source=thecentersquare.com&utm_campaign=%2Fnewsletters%2Flists%2Ft2%2Fillinois%2F&utm_medium=email&utm_content=headline

Excerpt:

An analysis by Pew Charitable Trusts shows that Illinois is one of only two states in the country with total tax revenue shortfalls exceeding 5% of total expenses, and the only ones with annual deficits in each of the past 15 years. The other state is New Jersey.

Pew state fiscal health manager Joanna Biernacka-Lievestro said Illinois is in select company.

“Nine states failed to collect enough revenue to cover their long-term expenses over the 15 years ending in fiscal 2020,” Biernacka-Lievestro said. “Secondly, Illinois was one of two states that struggled the most.” 

After New Jersey, Illinois had the largest deficit with aggregate revenue able to cover only 93.9% of aggregate expenses. In comparison, Indiana and Iowa were both close to 104%. Alaska collected 103.5%, yielding the largest surplus.

Author(s): Kevin Bessler

Publication Date: 4 Jan 2023

Publication Site: The Center Square

Tax Revenue in Most States Surpasses Pre-Pandemic Growth Trend

Link: https://www.pewtrusts.org/en/research-and-analysis/data-visualizations/2014/fiscal-50

Graphic:

Excerpt:

As the first quarter of 2022 came to an end and the United States passed the two-year anniversary of the start of the COVID-19 pandemic, total state tax revenue was at its highest level since just before its historic decline in early 2020. Collections were 18.1% greater than those for the final quarter of 2019, after adjusting for inflation and averaging across four quarters to smooth seasonal fluctuations. Only Wyoming and North Dakota had not taken in enough revenue to surpass their pre-pandemic levels.

Nationwide and in 31 states as of the end of the first quarter of 2022, cumulative tax receipts since the pandemic’s start, adjusted for inflation, were even higher than they would have been if pre-COVID growth trends had continued—despite fallout from the pandemic and a two-month recession. According to Pew estimates, Idaho led all states, with 16% more cumulative tax revenue than it would have collected under its pre-pandemic growth rate. New Mexico was second at 15.5% above the trend. Nationally, combined tax revenue at the end of the first quarter of 2022 was 3% above estimates of what might have been collected had the pandemic not occurred.

However, estimates also show that cumulative tax revenue fell short of its pre-COVID growth trend in slightly more than a third of states since the pandemic’s onset, and most other states’ recoveries largely followed historical trends.

Looking at cumulative totals since the start of the pandemic offers a way to identify states in which tax revenue has over- or underperformed since January 2020, based on pre-COVID trends. This approach also provides a different view of the strength of collections from the often-astonishing quarterly and annual percentage increases that were skewed by this particularly volatile period. For each of the nine quarters from Jan. 1, 2020 to March 31, 2022, Pew calculated the difference between actual tax revenue and estimates of how much each state would have collected had revenue grown at its pre-pandemic, five-year average annual growth rate.

Author(s): Melissa Maynard

Publication Date: 7 Sept 2022

Publication Site: Pew Trusts

12 States High Earners Are Flocking To

Link: https://www.thinkadvisor.com/2022/08/11/12-states-most-high-earners-are-moving-to/

Graphic:

Excerpt:

U.S. households that earn upward of $200,000 a year can have a significant impact when they move between states, despite their relatively small numbers, according to a recent analysis by SmartAsset. In 2020, these tax filers comprised 6.8% of total tax returns filed across the 50 States and the District of Columbia.

High-earning households’ influence is so great because a state that loses more of them than it gains in a given year may experience a decline in tax revenues and its fiscal situation may worsen.

As part of its analysis, SmartAsset identified the states with the most movement of high-earning households. Researchers examined the inflow and outflow of tax filers making at least $200,000 in each state and the District of Columbia between 2019 and 2020.

Author(s): Michael S. Fischer

Publication Date: 11 Aug 2022

Publication Site: Think Advisor

State Individual Income Tax Rates and Brackets for 2022

Link:https://taxfoundation.org/state-income-tax-rates-2022

Graphic:

Excerpt:

Individual income taxes are a major source of state government revenue, accounting for 36 percent of state tax collections in fiscal year 2020, the latest year for which data are available.

Forty-two states levy individual income taxes. Forty-one tax wage and salary income, while one state—New Hampshire—exclusively taxes dividend and interest income. Eight states levy no individual income tax at all.

Of those states taxing wages, nine have single-rate tax structures, with one rate applying to all taxable income. Conversely, 32 states and the District of Columbia levy graduated-rate income taxes, with the number of brackets varying widely by state. Hawaii has 12 brackets, the most in the country.

States’ approaches to income taxes vary in other details as well. Some states double their single-bracket widths for married filers to avoid a “marriage penalty.” Some states index tax brackets, exemptions, and deductions for inflation; many others do not. Some states tie their standard deductions and personal exemptions to the federal tax code, while others set their own or offer none at all.

Author(s): Timothy Vermeer, Katherine Loughead

Publication Date: 15 Feb 2022

Publication Site: Tax Foundation

Iowa’s Bold Tax Reform

Link:https://www.wsj.com/amp/articles/iowas-bold-tax-reform-kim-reynolds-11642614230

Excerpt:

Gov. Reynolds is proposing a bold tax reform that would increase the incentives to work and invest in the Hawkeye State. Her proposal unveiled last week would reshape the state income tax, gradually consolidating brackets en route to a flat 4% rate by 2026. “When the bill’s fully implemented,” she said, “an average Iowa family will pay more than $1,300 less in taxes.”

The flat 4% levy would drop the state’s top rate by more than a third. Under current law Iowans are set to pay 6.5% on earnings above about $80,000, a threshold that catches much of the middle class. That and three other income-tax brackets would be swept away by Gov. Reynolds’s reform.

The plan would also slash the state’s corporate tax, which is even more punishing. Iowa-based companies pay 9.8% of their earnings above $250,000 in state tax. Ms. Reynolds’s reform would gradually reduce the top rate to 5.5%, capping corporate-tax revenue at $700 million a year and using excess revenue to offset annual rate cuts. An immediate rate cut would be better economically, providing more clarity for corporate investment decisions. But the revenue target should be met if the economy continues to grow.

Author(s): WSJ Editorial Board

Publication Date: 19 Jan 2022

Publication Site: WSJ

How High Will California’s Taxes Go Before There’s No One Left To Tax?

Link: https://reason.com/2022/01/11/how-high-will-californias-taxes-go-before-theres-no-one-left-to-tax/

Excerpt:

It’s hard to say which of these is the “worst,” but the 2.3 percent gross receipts tax sticks out. That gross receipts taxes are an awful way to structure a business tax is one of the few things that tax policy experts across the political spectrum almost universally agree on. That’s because they make no allowance for the large variance in profit margins that different types of businesses make—whether a business has a profit margin of 0.1 percent or 10 percent, it would still have to pay the same percentage of its total revenues.

That’s a problem with any gross receipts tax, but California’s proposed tax would exacerbate this inherent problem with a rate that is three times the level of the nation’s current highest. The higher the gross receipts tax rate, the more low-margin businesses that could be put in a position where operating in California would lose them money.

Almost as bad is the proposal to institute a payroll tax on businesses with 50 or more employees. Not only are payroll taxes a regressive tax (even if the tax is imposed on the employer, it would be passed on to employees in the form of lower wages), but the 50-employee threshold would create an obvious disincentive for businesses to hire their 50th employee.

Author(s): JOE BISHOP-HENCHMAN AND ANDREW WILFORD

Publication Date: 11 Jan 2022

Publication Site: Reason

Stress Testing in Sacramento

Link:https://mailchi.mp/5ac903164813/stress-testing-in-sacramento-6602594

Graphic:

Excerpt:

In January the Department Of Finance will issue the Governor’s Budget for 2022-23. No section will be more important than the Stress Test, which forecasts revenue losses in the event of a stock market decline such as in 2001-3 and 2008-9.

Last January, the Governor’s Budget forecast revenue losses of $100 billion. Just two years earlier, the 2019-20 Governor’s Budget forecast losses of $50 billion. That makes sense because, as DOF explains, “the higher levels and valuations in the stock market increase the risk of a large stock market drop leading to a large decline in capital gains revenues” on which California is extraordinarily dependent.

….

Schools and other services need predictable annual funding. You should build reserves to the levels predicted by stress tests.

Author(s): David Crane

Publication Date: 5 Dec 2021

Publication Site: Govern for California (Mail Chimp)

States Are Seeing Steep Income Tax Revenue Growth. Will It Last?

Link:https://www.forbes.com/sites/lizfarmer/2021/12/01/states-are-seeing-steep-income-tax-revenue-growth-will-it-last/

Excerpt:

States collected nearly $455 billion in total income tax revenue in fiscal 2021—an astounding 14.7% increase over the prior year. That’s according to the latest report from the National Association of State Budget Officers (NASBO), which covers spending through June 2021. Over two years, income tax revenue is up 15%.

However, these numbers are highly influenced by unusual economic times. For starters, states delayed their tax filing deadline by several months when the pandemic began. For most, this pushed their 2020 income tax revenue into the next fiscal year. This artificially deflated 2020’s numbers while inflating 2021 collections.

The federal stimulus has also played a role. Since March 2020, the feds have doled out $867 billion in cash to households via three Economic Impact Payments. While those payments weren’t taxable, they could indirectly increase state tax liability for some. (The New York Times NYT +1% has a good explainer on that.) Plus, unemployment insurance — which most states do tax — received a massive boost for about 15 months.

Author(s): Liz Farmer

Publication Date: 1 Dec 2021

Publication Site: Forbes