Income growth was slower in 2013 than the year before in every state, according to new federal data. But don’t worry, it was all just the result of a year-old political fight.
Income growth may have slowed, but that’s not to say that there wasn’t variation. Growth from 2012 to 2013 ranged from 1.5 percent in West Virginia to 7.6 percent in North Dakota. But compare each state to its own recent record, and you’ll see incomes decelerating.
Why? Well, the “fiscal cliff” — the end-of-2012 fight over tax hikes and spending cuts. One of those expiring cuts, the payroll tax cut, was putting money into the hands of Americans. Once it expired, that money started flowing back to the government. Also, the comparison isn’t quite fair. Income growth in 2012 was artificially higher due to the fiscal cliff because of concerns that it would bring higher tax rates in 2013. To avoid those higher rates, some rich taxpayers shifted financial activities such as selling stocks and collecting income on bonuses to 2012. Here’s how the Bureau of Economic Analysis puts it:
The slower personal income growth reflected the effects of several special factors including the expiration at the beginning of 2013 of the “payroll tax holiday” (a temporary two-percentage point reduction in the personal contribution rate for social security) and the acceleration of the receipt of income, especially personal dividends and salary bonuses, into 2012 in anticipation of changes in individual income tax rates for 2013. The expiration of the payroll tax holiday increased contributions for government social insurance, a subtraction in the calculation of personal income.
The slowdown had consequences, too: we saw a similar — and related — slowdown in state tax collections. Incomes spiked in late-2012 as some sought to avoid the potentially higher tax rates, which meant states went into 2013 collecting more taxes for the year before. That bump in revenues early last year “appears to have been mostly attributable to the acceleration of income to tax year 2012 by some taxpayers driven by the fear of potential federal tax rate increases,” the folks at State University of New York’s Nelson A. Rockefeller Institute explained in a recent alert.
But that effect evaporated as the year went on, their report found. The burst and shrinkage in tax growth is just a corollary of what Tuesday’s federal data show. The fiscal cliff forced enough taxpayers to shift income to 2012, that growth that year appears to have been artificially high, to the detriment of growth in 2013. The report, however, doesn’t quantify the impact of the fiscal cliff, so there’s no telling for sure whether incomes in all states would still be down from the year before or not.