State Finances Are Still in the Red, Even As the Economy Is Growing

Kil Huh: “…while the national economy is growing, most states are still struggling to recover from the recession and its aftermath. According to an analysis from the Associated Press, two-thirds of the states face a budget shortfall or are expected to confront one in the coming fiscal year. In 32 states, tax collections fell in the second quarter of 2016—ending seven consecutive quarters of growth in overall state tax revenue.”

“A new administration in Washington has also caused uncertainty for states, especially with the potential for federal tax changes. Forty states that collect personal income taxes link to the federal tax system, meaning that changes to the federal tax code could cascade down and have a varied impact on states’ tax systems and revenue. For example, a reduction in federal itemized deductions such as the mortgage interest deduction might increase the amount of taxes paid to some states. In addition, even the possibility of Congress lowering federal tax rates could give some taxpayers, especially high earners, an incentive to time their income and deductions to take advantage of the change in rates, creating additional volatility in state tax collections.”

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