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U.S. states cheer April income tax deluge but analysts urge caution

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CHICAGO (Reuters) - April, typically a big revenue month for U.S. states that levy personal income taxes, was especially robust this year, making up for subpar collections in prior months, but analysts cautioned the tax surge underscores how state budgets face greater volatility from federal tax law changes and the stock market.

In California, where personal income taxes account for about 70% of the state’s general fund revenue, a year-over-year increase of 35.2% last month made up for lagging revenue from the tax in December and January, according to H.D. Palmer, a spokesman for the state’s finance department.

The state earlier this month boosted the forecast for the tax in its next budget by $1.78 billion.

The Republican tax overhaul known as the Tax Cuts and Jobs Act, which took effect in 2018 and included a $10,000 cap on state and local tax deductions, created a big unknown for budgets, particularly in high-tax states.

Some taxpayers accelerated their tax payments into December 2017 to head off the cap, inflating states’ calendar year-end tax collections. As a result, December 2018 collections fell in comparison, stoking fears that revenue goals for state budgets may be missed. April’s revenue burst brought budgets back into balance, sometimes with money to spare, and lifted tax collection projections for the coming fiscal year.

Taxes on wages and investment income are a top revenue source for states that collect them. April is the most important revenue month due to the tax filing deadline and the tendency of taxpayers who owe money to wait until the last minute to pay.

“Moving forward, states should be cautious about income tax revenue and shouldn’t be expecting the strong growth they’ve seen in April,” said Lucy Dadayan, a senior research associate who tracks state revenue at the Urban Institute.

She said the stock market will play a significant role in terms of capital gains-related income tax revenue for states, along with the behavior of taxpayers, who continue to navigate tax law changes and figure out loopholes to minimize their tax liability.

It is not yet clear how much of a role wages, capital gains or other factors played in spurring the higher income tax collections - and whether that level of revenue would be ongoing.

“My guess is a lot of it is capital gains that have suddenly appeared and you can’t necessarily count on that for next year,” said Ronald Alt, senior manager of economic and tax research at the Federation of Tax Administrators.

STATES TWEAK REVENUE FORECASTS

While New York and other states challenge the constitutionality of the state and local tax deduction cap on constitutional grounds in federal court, their budgets are getting whipsawed.

New York State’s net personal tax revenue, which lagged December and January prior year’s collections by $5.28 billion, zoomed 57.4 percent higher last month to $9.21 billion from $5.85 billion a year ago. The state projected the tax will bring in $380 million more in its budget for the fiscal year that began on April 1 than previously forecast.

Based on a $1.5 billion April revenue increase, fueled largely by a 35.5 percent spike in personal income taxes, Illinois Governor J.B. Pritzker raised the state’s fiscal 2020 revenue forecast by $800 million and yanked a proposal to reduce pension contributions.

David Hitchcock, an S&P Global Ratings analyst, said in the future, the month of April could account for a higher proportion of states’ income tax collections because taxpayers have less of an incentive to accelerate their tax payments.

“It creates a little more uncertainty in forecasting revenue than before. It makes April a little more of a question mark,” he said, adding that uncertainty poses more risk for owners of state bonds.

Seven states - Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming - collect no income tax, and two - New Hampshire and Tennessee - tax dividend and interest income, but not wages.

Reporting by Karen Pierog in Chicago; Editing by Matthew Lewis

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