Stateline Story

States Brace For April Surprise

Income tax time has been a good time for state governments in recent years, as the bullish stock market of the 1990's flooded state coffers with income and capital gains taxes that exceeded expectations.

No longer.

This year, most states are anxious about what the April tax season holds for them. Most are predict little to no growth over last year's tax take. Others expect to take in less than last year.

Some analysts say even those predictions may be a bit too rosy.

They point to the poor performance of the stock market over 2001 and say states may be in for an "April Surprise," only unlike the pleasant surprises of the recent past, this one could be more bust than boon for many states.

"For most of the second half of the 1990's [the April tax take] was a consistent and large surprise," says Nick Jenny, a fiscal analyst at the Rockefeller Institute of Government, a nonpartisan think tank at the State University of New York Albany.

"This is the first year where there's no upside surprise and the possibility of a downside surprise. April is being dragged down by what happened last year," he says.

States to watch will be those that profited most from the boom of the stock market during the 1990's, such as California, Connecticut, New Jersey and New York.

Over the past six years, many states did not adequately anticipate growth in personal wealth during the prior year, especially among high-income taxpayers, analysts say.

This meant states faced a large and welcome surprise come the first two weeks of April, the period during which 50 percent of all state income tax returns are filed.

"They were surprised, not only one year or two years, but for a number of years," says Arturo Perez, fiscal analyst for the National Conference of State Legislatures.

But such a surprise isn't coming this year. If anything, says the NCSL's Perez, some states may face a bigger hit come April than they are expecting.

"States have problems estimating income on the way up and have the same problems on the way down," says Perez.

And with roughly 40 states running budget deficits, any unexpected drop in revenue will be bitter news.

To make matters worse, all but a handful of states are entering the last few months of their fiscal years. So should April revenues fall short of expectations, states will have to cut deeply and quickly to balance their books.

"It's late in the ballgame," says Perez.

Perhaps no state better exemplifies the perils of fiscal forcasting than New Jersey.

The state's recently-installed governor, Democrat James McGreevey, rolled into office in January saying his predecessor, Republican Acting Gov. Donald T. DiFrancesco, misled the public about the budget and ignored warnings of an imminent decline in tax revenues

In December, DiFrancesco claimed the budget was balanced, while McGreevey forecast a $1.9 billion budget deficit.

Now, the consensus estimate is that the deficit has grown to $2.9 billion, with a $5.3 billion shortfall looming next year. As a percentage of total revenues, New Jersey's deficit for fiscal year 2003 is the country's largest.

"The magnitude of the deficit is still a little hard to believe," says Ralph Siegel, spokesman for the New Jersey Department of Treasury.

One reason for New Jersey's woes is that the state expects to take in more than $1 billion less in income taxes this April than the last. Such a year-to-year drop is rare, since even in a poor year revenue normally increases at least a little from the previous year.

But even the expected $1 billion April hole may be a bit too generous an estimate. The problem is no one really knows.

"What is reasonable? Is it 10 percent, 20 percent, 30 percent off from last year?" says Dick Kaluzny, head of the Office of Revenue and Economic Analysis within the Office of the State Treasurer.

Kaluzny says he'll have the money counted by May 10, just in time for a May budget hearing during when the budget will receive final tweaking.

Should the pessimists prove prescient, New Jersey will have little time before the June 30 end of the fiscal year to balance its books. McGreevey has already proposed cutting farmland preservation, school construction, after-school tutoring and job-training programs, and 600 workers have received layoff notices.

"What's due in April is 25 percent of the entire income tax collection for the year," says Kaluzny. "You can be close on that and still get really burned because it's the end of the fiscal year and there's not a whole lot of flexibility as to how you can adjust your budget."