April Cruellest Month For State Budgets

“April is the cruellest month,” T.S. Eliot lamented in his epic 1922 poem, The Waste Land.

State lawmakers might be inclined to agree after tallying up April income tax collections that in many cases fell far short of expectations. Though the evidence remains anecdotal, it is abundant enough to point to a terrible April for many states.

The poor tax take threatens to tear apart budget agreements crafted on the most fragile of compromises, imperiling social service programs and education spending and perhaps even pushing some states to raise taxes.

“The results have been pretty abysmal, with California being the most notable,” said John Youngdahl, vice president and senior economist with Goldman Sachs and one of the few analysts to predict a significant decline in income tax revenue.

California Gov. Gray Davis (D) announced Tuesday (5/15) that the state faces an unprecedented budget deficit of $23.6 billion. Just a few months ago, he estimated the shortfall to be $12.5 billion.

Davis blames the growing deficit on a decrease in tax revenue from California’s wealthiest residents, whose earnings from capital gains and stock options fell during last year’s downturn in the stock market and the bursting of the technology bubble.

The magnitude of the deficit, which was apparent only after April’s tax receipts had been tallied, has prompted Davis to propose cuts in everything from health insurance to state trial courts. And in a dramatic reversal of course in an election year, Davis plans to push for tax increases. Davis said in January he would not raise taxes.

“The problem is twice as large as predicted in January,” Davis said Tuesday, The San Francisco Chronicle reported. “To balance this budget entirely without any increases whatsoever would have required substantial reductions in education [spending], which I was not prepared to do.”

Stories of similarly abysmal income tax takes are emerging from other states.

Michigan income tax revenues are down $348.1 million for February through April compared to the same period last year, a drop of 24.6 percent, reports the state House Fiscal Agency.

Iowa had to pay out $60 million in higher-than-anticipated income tax refunds, according to the Legislative Fiscal Bureau.

Utah reports that income tax collections are off $142 million from projections.

Massachusetts expects to see an 80 percent drop in income tax revenue from capital gains once all the money is counted, The Boston Globe reported. The state received about $1 billion from capital gains taxes in 2001, and is expecting $200 million or less this year.

New York income tax revenues could be off by up to $1.3 billion from January projections, Gov. George Pataki (R) told The Albany Times Union .

These figures come at a bad time. Already, the slumping economy has forced more than 40 states to cut spending or plan to do so soon in such areas as roads, education and healthcare to balance budgets.

Some states are considering tax and fee increases to keep services intact, a tough sell during an election year.

Like Davis in California, two other governors have lobbied in recent days for such increases in the face of ever-worsening fiscal news. Both governors are Republican and neither is running for reelection.

Kansas Gov. Bill Graves is touring his state in an effort to drum up support for a package of tax increases to forestall $300 million in spending cuts. Those cuts would reduce most agency budgets by 7.9 percent, a reduction that comes on top of cuts ordered earlier in the year.

Illinois Gov. George Ryan is floating a bevy of new revenue sources, including tax increases on cable television and cigarettes, allowing for more slot machines and gaming tables at casinos and ending numerous corporate tax breaks, The Chicago Sun-Times said.

Many state leaders were caught off-guard by the degree to which income tax collections fell in April, the month during which 50 percent of all state income tax returns are filed.

Some analysts say states should have known better, given the poor performance of the stock market in 2001 and private sector reports suggesting significant downturns in capital gains income.

Goldman Sachs, for example, warned investors in March that final income tax figures would be down dramatically.

“We were quite negative on the likely tax take this April. . .due to the sizeable downturn in capital gains incomes,” said Goldman Sachs’ Youngdahl. “We didn’t have a lot of information on it, but what we’d seen was pretty atrocious.”