IE 11 Not Supported

For optimal browsing, we recommend Chrome, Firefox or Safari browsers.

State Revenues Battered

A slide in income-tax collections and a rise in tax refunds take their toll on state budgets.

WASHINGTON, D.C. -- A sharp decline in income tax receipts during the first quarter of the year and a rise in the amount of refunds taxpayers are seeking are causing further stress to already battered state budgets, according to new information released by the National Governors Association on Tuesday.

The drop in collections is mostly attributable to income not subject to withholding, including capital gains, rents, interest, dividends and stock options. The increase in refunds is caused by greater than anticipated short-term layoffs, reduced hours and other forms of wage and salary income, such as bonuses, said Ray Scheppach, executive director of the NGA.

The NGA, the National Association of State Budget Officers, the National Conference of State Legislatures, the Federation of Tax Administrators and the Nelson A. Rockefeller Institute of Government said in releasing the numbers that state policy makers should "expect continued stress as they attempt to develop balanced spending plan in fiscal years 2003 and 2004 even if the economy continues the upturn reported for the first quarter."

General findings from the groups' survey of states include:

- Total individual income tax collections in the first quarter were 14 percent or $14.5 billion below the level they were a year ago. In April alone, collections fell by 21.4 percent or $8.5 billion.
- Withholding tax collections, influenced by the recent drop in employment, were off by about 3 percent during the first quarter from a year ago.
- The dollar amount of individual income tax refunds process by states increased by nearly 14 percent during the 2002 processing season. In total, states have paid out about $3.5 billion more in refunds this year than in 2001.
- Estimated payments received in the first quarter, generally considered to be a harbinger of expected receipts in the year ahead, were running nearly 27 percent behind those from a year ago.

States experienced an estimated $40-50 billion budget shortfall in fiscal year 2002. For most states, the next fiscal year begins in July, and significant shortfalls are again expected.

To assist states, which are required to balance their budgets, through the downturn, the NGA has asked Congress to pass legislation to increase the federal share of Medicaid (FMAP) by 1 percentage point for each state for an 18-month period beginning April 1. This would be worth approximately $3.7 billion to all states and territories.

The proposal would also hold harmless states that would otherwise see their federal share of Medicaid decrease, which would be worth about $800 million, as well as a $4.4 billion social services and health care block grant. The total value of the package is approximately $8.9 billion.

The data were culled from a survey of the 41 states and the District of Columbia that have broad based individual income taxes.

The National Governors Association