‘Trump effect’ could cost states lost tax revenues

‘Trump effect’ could cost states lost tax revenues

Tax revenues dropped in states across the country in April as wealthy individuals waited for Congress to act on a promise to reform the tax code — a phenomenon some observers are dubbing the “Trump effect.”

Total tax collections in April fell 4 percent over last year, according to a Rockefeller Institute of Government of 41 state governments. The analysis suggests wealthy taxpayers likely shifted taxable income they could have collected in 2016 to 2017, when they expect rates on capital gains will be lower after President Trump’s tax reform push.

“Trump had promised large income tax cuts particularly for the top tax rate, which means, if implemented, it would largely benefit high-income taxpayers,” said Lucy Dadayan, an author of the Rockefeller Institute study. “Many high-income taxpayers had large incentives to shift non-wage income from tax year 2016 to tax year 2017 in anticipation of lower tax rates.”

Major policy shifts at the federal level can lead to booms and busts for state government tax collections.

When Congress raised the top tax rate as part of the fiscal cliff negotiations in 2012, wealthy taxpayers moved some income ahead so it would be taxed at a lower rate. That meant states received a windfall in April 2013 — and a dramatic slump in April 2014, when the higher tax rate applied.

Now, taxpayers are holding back their income in anticipation of a lower top tax rate. As a candidate for president, Trump promised to lower the top personal income tax rate from 39.6 percent to 35 percent, and to eliminate a 3.8 percent net investment tax that helped fund the Affordable Care Act.

Trump also proposed lowering the top tax rate for businesses to 15 percent, giving those corporations a reason to delay taking income.

Twenty of the 41 states the Rockefeller Institute surveyed said estimated tax payments had fallen below last year’s level. Nationally, estimated payments dropped by 4.6 percent. States like Massachusetts, New York, North Dakota, Oklahoma and Rhode Island all saw tax revenues drop by more than 10 percentage points.

Still, Congress has yet to take up a tax reform proposal. The House Budget Committee this week approved a budget resolution that would allow the Senate to take up tax reform through reconciliation, meaning a final plan would require only 51 votes rather than 60.

Dadayan said Trump’s tax proposals would hit state budgets hard, even after they are implemented and wealthy taxpayers begin taking more income.

“This tax cut plan will largely benefit wealthy taxpayers and will result in substantially lower tax revenues for state and local governments,” Dadayan said. “Many states had to tighten spending and even implement mid-year budget cuts to address revenue shortfalls.”

Taxpayers are most likely to defer taking capital gains income, money earned from the sale of stocks. That hurts states that rely more heavily on capital gains taxes — states like New York, Connecticut, Massachusetts and California, all of which rely on those taxes for 9 to 11 percent of their annual tax revenues.

Capital gains taxes are mostly paid by the extremely wealthy. In 2014, the Rockefeller Institute found, 70 percent of all capital gains were earned by the top 0.7 percent of taxpayers, those with adjusted gross incomes of more than $500,000 a year.