Tax revenue deluge hits southwestern states in April

April tax receipts set records in southwestern states as a strong economy and high inflation boosted income and sales tax receipts, although some officials are urging caution then that uncertainty darkens the months to come.

Texas, Oklahoma and Arkansas posted record collections as states begin reporting their April revenue performance.

All is well for the state coffers, according to Mark Zandi, chief economist at Moody’s Analytics.

Mark Zandi, chief economist at Moody’s Analytics, says all is well for government coffers, although recession risks loom.

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“The labor market is strong, supporting tax revenue, consumer spending is robust, fueling sales tax revenue, corporate profits are soaring, fueling corporate taxes and house prices increase, which increases property tax revenue,” he said. “Of course, high inflation is also a powerful tailwind for income growth.”

Zandi warned that revenue growth will falter going forward as the Federal Reserve works to slow economic growth and contain inflation, which rose 8.5% in the 12 months to in March, its biggest increase since December 1981.

“Recession risks are also on the rise. Now is the time for state and local government officials to build their rainy day funds,” he said.

April is typically the biggest income month for states that tax personal income and last month marked the first time since 2019 that those returns were due in April. The COVID-19 pandemic has led the US Internal Revenue Service to delay its April 15 tax filing deadline in 2020 and 2021, with states following suit.

Oklahoma’s gross receipts topped $2 billion for the first time in a month, propelled by personal and corporate income taxes, which raised $1.1 billion.

“The record performance numbers are a testament to the strength of the state’s economy,” State Treasurer Randy McDaniel said in a statement. “Even so, there are signs that would urge caution in the future.”

He pointed out that sales and use tax receipts rose by less than the rate of inflation at 2.9%, and that gross production and motor vehicle revenues are below April 2021 collections. .

Still, gross revenues from oil and natural gas production hit a record high in March and total tax revenue over a 12-month period rose $2.86 billion, or 21.1%, from the previous 12 months.

Texas, which does not tax personal income, reported its biggest April for sales taxes, its biggest source of state revenue, with $3.83 billion raised, up 12.8% compared to April 2021.

“State sales tax collections reached a new high for the month of April, with double-digit growth reflecting both inflation and the continued expansion of real economic activity and employment,” Texas Comptroller Glenn Hegar said in a statement.

Some of the state’s other taxes recorded their highest monthly collections on record — $666 million from the oil production tax, $76 million from the hotel occupancy tax and $152 million taxes on alcoholic beverages.

With four months left in the state’s fiscal year, tax revenue from oil production exceeded total collections for fiscal year 2021 by 9.7%, at $3.78 billion. Year-to-date sales tax revenue, at $28 billion, was up 22.3% from the same period a year ago.

April also brought Arkansas its largest monthly net income inflow in state history, topping the $1 billion mark for the first time at $1.125 billion, $532 million more than the economic forecast for the month.

At $810.8 million, personal income tax revenue nearly doubled the forecast for the month. Two months to the end of fiscal 2022, general fund revenue is already nearly $1 billion higher than forecast.

Governor Asa Hutchinson said a booming economy and rising prices for consumer goods had boosted incomes, but warned of “significant uncertainty” about the national economic outlook.

Taxpayers need and deserve at least some of the surplus returned to them because the state should not generate such a large surplus,” he said in a statement, adding that the state must be careful when considering the options. for the surplus.

As Arkansas recorded its largest monthly influx of net tax revenue, Gov. Asa Hutchinson warns of “significant uncertainty” about the national economic outlook.

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Records will likely be set in other states as well, according to Justin Theal, a state fiscal health project officer at The Pew Charitable Trusts.

Outside of the Southwest region, Illinois’ general fund revenue of $8.037 billion in April was the highest base revenue total for any month in state history and was been driven by a record month for income tax collection, according to a report by the legislative agency.

Rising incomes have triggered tax cuts in several states, Theal said.

“Whenever there are good budget years, policymakers definitely feel the pressure to return some of that budget surplus to the taxpayer” or to increase spending or expand certain programs, he said.

About a third of states are pursuing “significant general fund tax reforms this legislative session,” S&P Global Ratings reported last month.

With April tax receipts of $1.51 billion beating recently revised estimates of 13.4%, Democratic Kansas Governor Laura Kelly called for an accelerated removal of the state’s sales tax on groceries.

“These tax collection receipts reiterate the fiscal health of the state and make it clear that we can afford to push back the ‘food tax ax’ implementation date to July 1 of this year,” he said. she said in a statement. “I call on the Kansas Legislature to do so as soon as they return later this month.”

A bill passed by the Republican-controlled Legislature last month cuts the tax to 4%, from 6.5% on Jan. 1, 2023, to 2% in 2024, and eliminates it in early 2025.

Brian Sigritz, director of state tax studies at the National Association of State Budget Officers, said nearly all state revenue is above fiscal year 2022 projections and, in some cases, exceeded the upwardly revised estimates.

“Revenue streams have remained very unpredictable and highly volatile. It remains difficult to predict state tax revenues due to what we have seen happening with both the economy and the pandemic,” he said, adding that projections call for less growth over the course of fiscal year 2023, which begins July 1 for most states.

In its report, S&P said it expects states to begin fiscal year 2023 “with an increased fiscal cushion, following recent legislative moves across the country to direct portions of recent excess revenue to reserves for rainy days”.

“While we believe some state budgets are better positioned than others for slower growth, we expect historically high levels of reserves over the past decade will support stability over the next fiscal cycle,” said the rating agency.

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