GOP Tax Bill Could Destabilize State Revenues

GOP Tax Bill Could Destabilize State Revenues


State and local tax revenues grew at a significantly faster pace in the final quarter of 2017, according to preliminary data analyzed by the Rockefeller Institute of Government.

The bump may be temporary, though, driven in part by the passage of the Tax Cuts and Jobs Act (TCJA) in December, which motivated some residents of high-tax states to prepay their taxes in 2017 in order to take advantage of the state and local tax deduction that's capped at $10,000 starting in 2018.

Overall, the Rockefeller Institute found that the Republican tax overhaul has raised serious issues state and local tax collection. “One thing is for sure,” the reports says, “state and local governments face large fiscal uncertainties and state forecasters are struggling to sort out various impacts of the TCJA on the state tax revenues.”

Rockefeller expects state and local tax revenues to fluctuate over the coming quarters as a result of the tax bill, as high-income taxpayers look for new loopholes in the law and adjust their behavior accordingly. Additionally, some high-tax states are exploring ways to reduce the impact of the new tax rules, and the success or failure of those measures could affect revenues in ways that are hard to predict. The net effect is likely to be slower growth in tax revenues in the first quarter of 2018, and a possible fall in revenues as the year progresses.