This April, personal income tax revenue fell by an average of 9.88 percent compared to the same period last year in the 32 states for which Reuters has data (Puerto Rico as well). April is the most important revenue month for states because it contains the tax filing deadline and taxpayers tend to wait until the last minute to pay any taxes that may be owed from the prior year.
Due to the drop in income taxes, and April being near the end of the fiscal year for many states, states that were depending on a strong inflow of revenues in April are now left scrambling to fill budget gaps. The narrative being used to paper over the real issue of the economy only producing lower paying jobs, is that the drop is being driven by less capital gains taxes, as Don Boyd, Director of Fiscal Studies at the Rockefeller Institute of Government in Albany, NY. puts forward:
"The kinds of income that are kind of driving this are particularly capital gains related to the stock market. If you had to find a No. 1 culprit, that's it."
To be sure, a flat market in 2015 hurt capital gains taxes that states collected in April. However, an even bigger reason for the dip is that despite what we're told about strong fundamentals underlying the economy, the fact of the matter is that jobs are being created have been in low paying sectors, and jobs that were created in higher paying sectors were mostly part-time, which pay less than the average sector wage. As a reminder, since January 2015 the economy has added primarily bartender and waiter jobs.
States that were hardest hit were Louisiana (down 81.5%, the plunge due in part do a change in the way refunds are issued), North Dakota (down 34.7%), New Jersey (down 14.8%, which as Reuters notes, has a tax structure that depends on wealthy residents - or lack thereof), Illinois (down 28.8%, which is no surprise as millionaires are fleeing the state in droves), and Ohio (down 41.3%).
One state that actually saw some upside was Kansas, which after slashing income tax rates in 2013 is now seeing personal income tax revenues up 23%.
With the market continuing to trade sideways, and as the economy continues to create lower paying jobs, which is now the new normal, states will be forced to reconsider just how much income tax revenues can be relied upon to fund those out of control budgets.