High-Tax States Get Fleeting Financial Boost From New Law

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High-tax states are receiving a welcomed, if temporary, financial boost thanks to Washington.

In California, which will be heavily affected by the $10,000 limit on state and local deductions enacted last month, December revenue collections came in at $16 billion, or 32 percent more than forecasts, according to the Legislative Analyst’s Office. New York’s revenue was also higher than expected.

Connecticut Governor Dannel Malloy on Monday said estimated personal income taxes in December and January will exceed projections by more than $900 million after residents rushed to prepay the next year’s taxes before the deduction cap kicks in. It also stemmed from a 2008 law that required hedge funds to bring offshore profits back to the U.S. by the end of last year.

“This is very promising news for the state,” Malloy said.

The influx is providing a short-lived boost to the states, whose residents will be among the most heavily squeezed by the deduction changes that helped cover the cost of corporate tax cuts. Over the longer term, those changes are expected to hurt high-cost states by making it more difficult to raise taxes, given that all of those levies couldn’t be used to drive down residents’ liabilities to the federal government.

In New York, some residents stood in long lines to prepay their taxes to temporarily keep the change at bay. New York Budget Director Robert Mujica said the influx shouldn’t be mistaken as a positive sign.

“The fact that taxpayers are going to such lengths demonstrates just how devastating the federal tax changes are to many New Yorkers,” he said in a statement Sunday. “The federal cap on state and local tax deductions is a painful reality, effectively raising property taxes and reducing home values.”

Connecticut said a large amount of the extra revenue resulted from the requirement that hedge fund managers who earned fees offshore bring the profits back to the U.S. The governor’s office said “hundreds of millions” of the payments came from residents looking to beat the deduction cap, though how much exactly won’t be known until returns are filed by April.

California’s Legislative Analyst’s Office said the increase last month may come at the expense of tax payments that would otherwise have been received this year.

“It certainly seems plausible that a significant amount of the bump in December may very well be associated with the issues of income acceleration or timing as opposed to underlying strength in the liability,” H.D. Palmer, a spokesman for California’s finance department, said in a telephone interview Monday.

While California has benefited from a resurgent economy, Connecticut has been dogged by budget deficits as its economy struggled to join in the national recovery.

Connecticut lawmakers approved a $41 billion two-year budget in October that closed a $3.5 billion deficit in part by raising hospital taxes and cutting aid to state universities.

That budget requires the state to steer into a reserve fund any revenue exceeding $3.15 billion that comes from capital gains and bonuses.

November’s consensus revenue projection for those payments was $3.14 billion, which means that only $10 million of the increased collections could offset the budget deficit because the rest will be transferred into the rainy day fund. The state is projecting a $224 million deficit for the current fiscal year.

“We still need to take steps to close the deficit this year and to avoid one in the year that starts in July,” Malloy said. “If we take those steps and use these one-time revenues to rebuild our rainy day fund, we will give Connecticut residents and businesses the fiscal responsibility they have been demanding.”


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Loknath Das

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