AUGUSTA, Maine — Many states, particularly along the Eastern Seaboard, are entering budget crisis mode as a result of eroding income tax collections. Maine is seeing a similar trend, but no crisis is expected here.
Michael Allen, director of research and econometrics for Maine Revenue Services, said the state’s income tax receipts were more than 15 percent lower in the first quarter of this year than in 2013. That’s due to factors ranging from state income tax cuts enacted by Gov. Paul LePage’s administration that went into effect in January 2013 to federal-level income tax increases associated with implementation of the Affordable Care Act that hit taxpayers at the same time.
The federal tax increase caused a flurry of financial activity in late 2012 by filers, particularly high-income earners, trying to avoid higher federal taxes, which in turn led to higher tax payments in early 2013. That has made 2014’s year-over-year numbers look especially dismal.
“It’s true that [personal income tax revenues] were down more than 15 percent in the first quarter but that’s exactly what we had projected,” said Allen of revenue and economic recovery projections made last fall. “All of the states, including Maine, saw that surge in income last April. We knew we were going to see a similar reduction this April in revenues.”
Other factors from recent years still producing ripple effects on state budgets were uncertainty in late 2013 related to the extension of President George W. Bush-era tax cuts and the 16-day federal government shutdown that resulted from a budget impasse in Congress and led to across-the-board cuts.
Forecasting state tax revenues isn’t the kind of process that attracts widespread attention but it’s crucially important for the governor and the Legislature when they develop biennial budget proposals two years into the future.
If the projections are too optimistic, it can lead to severe financial problems that have to be addressed midbudget. If projections are too pessimistic, they can cause lawmakers to make cuts that in the end weren’t necessary, harming state government’s ability to provide essential services.
Allen said several states, mostly along the East Coast, are dealing with severe budget shortfalls because people and businesses are shielding more income from taxes, altering their spending patterns or scaling back purchases altogether.
An analysis by The Washington Post last week cited a study by the Rockefeller Institute in its findings that nationwide, personal income tax revenue fell by 0.4 percent in the first quarter of 2014, which represented the first year-over-year decline since the Great Recession hit in late 2008.
Allen said another factor at the state level contributed to Maine’s 15 percent decline in income tax revenue. As part of the biennial budget bill passed last year, the former Circuit Breaker program, which provided property tax refunds out of its own pool of money, was absorbed into the state’s income tax code as part of the new Property Tax Fairness Credit, which is now calculated on the state’s income tax form. Allen said that has resulted in an increase in the amount of income tax refunds the state is paying this year.
Allen said sales tax revenues were somewhat weak over the winter because of the extraordinarily cold weather, which caused buyers to stay home or forced them to spend more of their income on heating costs, but that he expects sales tax revenues to rebound beginning this month.
Temporary increases to the sales, meals and lodging taxes, which went into place in July 2013, also could have caused reductions in consumer spending in Maine, he said.
“I’ve seen a number of reports over the past week or two about states that were overly optimistic about April 15, and there were a number of states across the country that have had significant budget holes open up,” said Allen. “They’re now realizing that their budgets are out of balance, but that’s not the case here. … When you look at some of these other states, we did a heck of a job of forecasting what would happen this April even with some real challenges. We came in about as accurate as one can expect.”
What does it all mean?
If budget problems arise between now and the end of the state’s two-year budget in June 2015 and revenues continue their current trends, they will likely be because of spending problems, not tax lagging collections.