“We expect that tax revenue collections will show continuous and steady growth in the coming quarters due to the disappearing impact of the federal fiscal cliff,” the authors of the report write.
Though federal lawmakers struck a deal hours into 2013 to avoid the impact of the large set of tax hikes and spending cuts that comprised the fiscal cliff, the debate leading up to that moment substantially affected investor behavior. The threat of a potential — and eventual — capital gains tax hike led investors to shift income to the 2012 calendar year by cashing in stock market gains, for example.
“Officials in many states anticipated large swings in income tax collections tied to the fiscal cliff, yet it was extremely hard to forecast the magnitude of the impact,” Lucy Dadayan, a senior policy analyst at the Institute and co-author of the report said by e-mail. “While state officials in general tried to be cautious in their forecasts, the income tax returns filed in April 2014 for tax year 2013 indicated that actual income tax collections were below the forecasts in many states.”
The cliff’s impact was hardest on states heavily dependent on income taxes, Dadayan says.
Now, the disappearing impact of the fiscal cliff has allowed personal income taxes to begin to grow again, by 4.1 percent in the third quarter.
That contributed to overall estimated growth of 4.4 percent, which was broad-based. All major sources of revenue saw growth, as did all regions. Growth was strongest in the Southwest and Rocky Mountain areas, which posted 8.7 percent growth each, while growth was weakest, at 2.6 percent, in New England.