May 12, 2015
Early indications are that most states experienced a positive “April surprise” this year, in contrast to last year. April surprises often occur in states after taxpayers pay both their federal and state taxes. Sometimes the surprise can be a positive one as states experience higher than projected tax windfalls. Other times the surprise can be negative as was the case for most states last year. The primary reason for the slowdown in 2014 was related to the federal “fiscal cliff”. In 2013, states experienced temporary gains in revenues as taxpayers took actions to avoid scheduled higher federal taxes; in 2014 states did not experience the same one-time gains.
The positive April surprises appear to be widespread this year, with states from different regions seeing revenues come in above forecast. For example, in the East, New Jersey now expects to exceed revenue projections by $200 million in fiscal 2015, while in Pennsylvania, April revenues exceeded projections by about 5 percent. States seeing stronger than projected revenue growth in the South include North Carolina, which is now expecting to collect about $400 million more than forecasted this fiscal year, and Arkansas, where April revenues increased 9.4 percent compared to last year. In the Midwest, Missouri’s April revenues grew 11.9 percent compared to last year, while year-to-date totals are up 7.7 percent. Additionally, in Illinois, revenues are now expected to be about $300 million to $500 million higher than previously forecasted, allowing the state to reverse some social services spending cuts. Finally, in the West, income tax revenues increased 30 percent in Arizona in April, and in California, revenues exceeded forecast by more than $1.6 billion last month.
The strong April collections have even helped some states impacted by the decline in oil and other severance taxes. For example, in West Virginia, overall revenue collections were 5 percent above target in April, which officials hope will lead to a balanced budget for the year, and in Oklahoma, income tax collections were up 8.2 percent compared to last year, while taxes on oil and natural gas were down 54 percent compared to last April.
This year’s April surprise will likely help more states meet or exceed revenue projections for fiscal 2015, which ends on June 30th for 46 states. However, most of the gains are due to an increase in income tax collections, partly from the strong stock market performance in calendar year 2014, and are viewed as one-time occurrences. Growth in other less volatile revenue sources, including sales taxes, remains somewhat sluggish. Additionally, not all states are seeing revenues above projections and a number of states still face budget difficulties brought on by various issues including the aforementioned decline in oil prices, prior federal cuts, tax-related changes, mandatory spending pressures, and long-term liabilities. Most states’ recommended budgets for next year project only modest revenue growth, accompanied by moderate increases in state spending. Budget proposals for next year remain cautious, with an emphasis on ensuring that budgets are structurally balanced and sustainable. It is probable that in fiscal 2016 state general fund spending will grow for the sixth consecutive year, with each of these years below states’ historical level of growth.