State Corporate Tax Receipts Just Crashed The Most Since The Recession

After flatlining for the past year, US income tax receipts - both at the federal government and on a state and local level - have been disappointing, and have posted a sharp drop since the start of the year, which is "sounding an alarm about the health of the US economy" in BofA's words (in addition to the countless other alarms about the health of the economy, which however are ignored due to the record stock market).

As Bank of America highlights something we warned about last September, according to the Rockefeller Institute and CBO, US federal income tax receipts have come in about 3% below expectations this year.

Digging deeper, the disappointment was largely in personal current tax receipts, with withheld tax receipts showing little growth over the prior two quarters. The story is a bit different for state and local governments where personal tax receipts were fairly stable, but there was a significant decline in tax receipts for corporate income.

In fact, corporate income tax receipts fell a sharp $7bn in 1Q, the biggest drop since the recession. Since corporate income tax receipts only make up about 14% of the total, there was still a modest gain in overall state and local tax receipts. While there has been particular weakness of late, the trend through last year was weak; according to the Rockefeller Institute, total state tax collections grew only 1.2% in FY16 (declined in real terms), the weakest performance since 2010.

In an attempt to explain away this otherwise troubling development, the CBO has proposed that the weakness in tax receipts may reflect the shift of taxpayer income into later years on the anticipation of legislation to reduce tax rates, which however is looking increasingly unlikely. Presumably this would have the biggest effect on high income and high net-worth individuals. And this will matter for the aggregate figures as the top 1% of earners account for almost 40% of federal personal income tax receipts.

If, indeed, it is the case that high-net worth individuals and smaller corporations are delaying payments, there would be pent-up tax receipts. As such, tax receipts should jump if and when tax reform is passed or it becomes clear it will fail. Either way, behavior should shift, leading to an increase in declarations of income. The question is over timing

A more likely explanation is that state tax collections continue to be strain from the energy sector, which pays taxes based not on non-GAAP imaginare "wishful earnings", but on hard cash, which for most companies, is still a trickle. This is confirmed by a map of tax receipts on a geographical basis which isolates the energy-patch states. There is a clear pattern of weakness in energy states like Wyoming, West Virginia, Texas, Oklahoma, and North Dakota. Alaska is also heavily oil-dependent and while growth in tax receipts increased sharply, it is coming from a subdued base.

While a modest recovery in oil prices earlier in the year may have helped, the recent decline will undoubtedly add to further pressure on state corporate tax receipts.

Why does this sharp drop in tax revenues matter? Simple: tax receipts are tracked for varioous reasons, most directly they influence the forecast for government spending. As BofA notes, "a slowdown in tax receipts could lead state and local governments to reduce spending or increase taxes to make ends meet."

According to the Rockefeller Institute, uncertainty surrounding federal tax reforms "leaves the states in the dark as they are finalizing state budgets for the fiscal year 2018." It would seem the combination of potential policy changes on the horizon and the weakening in tax collections results in weak state and local spending. And the data already show hesitance on the part of state and local governments, with state and local government expenditure slicing an average of 0.06ppt from GDP growth over the past four quarters (Chart 3).

 

On a federal level, it will impact the amount the government has to borrow to fund its deficit, therefore determining when the government will hit the debt ceiling. This is quite relevant today since the debt ceiling was officially reached on 17 March and has been extended using extraordinary measures. However, the weakness in tax receipts could create challenges, pulling forward the date that the debt ceiling is hit. This was likely a motivating factor for Treasury Secretary Mnuchin to ask Congress to raise the debt ceiling before the Congressional summer recess begins on 28 July. In our view it is possible this becomes another point of conflict in Washington in coming weeks.

But most importantly, economists care about tax receipts because it is one of the few unvarnished, unadjusted, and realistic data points regarding the health of the overall economy. Tax receipts are a function of income creation in the economy: a slow-down in tax receipts indicates a slowing in income creation and therefore overall economic performance. Growth in federal tax receipts trends with the growth in aggregate payrolls (aggregate hours worked x earnings), which is why the recent deterioration in federal tax receipted is especially troubling.

Comments

GUS100CORRINA NugginFuts Fri, 06/09/2017 - 17:28 Permalink

State Corporate Tax Receipts Just Crashed The Most Since The RecessionMy response: Tax receipts are low because the USA is in a RECESSION!!!!!!!!!!!PROOF IS BELOW FROM JOHN WILLIAMS (www.shadowstats.com)====“No. 890: May Employment, April Construction Spending and Trade Deficit Revisions”– Trade-Deficit Benchmarking Showed Deeper Deficits 2014-to-Date, with Implications for Downside Benchmark Revisions to the GDP (** RECESSION? **)– Second-Quarter 2017 Real Merchandise Trade Deficit Is on Track for Worst Showing Since Second-Quarter 2007  (** RECESSION? **)– In Uptrending, Low-Level Stagnation, April Freight Index Gained Year-to-Year, Holding Shy of Recovering Pre-Recession Peak by 12.6% (-12.6%) – May Real-World Employment Conditions Continued in Annual Decline, at a Pace Not Seen Since the Depths of the 2009 Collapse  (** RECESSION? **)– Monthly Payroll Gains Slowed on Top of Downside, Prior-Period Revisions – Slowing, Unadjusted Year-to-Year Payroll Growth Held at Low Levels Common to Periods Preceding Economic Recession  (** RECESSION? **)– May 2017 Unemployment: U.3 Declined to 4.3% from 4.4%, U.6 Fell to 8.4% from 8.6% and the ShadowStats-Alternate Eased to 22.0% from 22.1% – Labor Numbers Out of Balance: April 2017 Headline Unemployment of 4.3%, Lowest Since March 2001, Coincided with Weakening, Near-Historic Lows in the Participation Rate (Labor Force/Population) and Employment-to-Population Ratio – In Contrast, March 2001 Headline Unemployment of 4.3% Coincided with Participation Rates and Employment-Population Ratios Just Off Historic Highs – Real Construction Spending Remained 21.3% (-21.3%) Short of Recovering its Pre-Recession Peak, Still Holding in Low-Level Stagnation – Money Supply M3 Annual Growth Rose to 3.6% in May, versus 3.4% in April

In reply to by NugginFuts

papa song Fri, 06/09/2017 - 15:25 Permalink

Theres only one way out of the ponzi.  Raise (taxes) away! boys and girls!Under the current fiscal paradigm, the idea that govt. will tighten its belt is laughable.

I am Jobe Fri, 06/09/2017 - 15:34 Permalink

Time to raise property taxes and fgas taxes in Texas. BTW Don't mess with Texas. we have enough  pussies in Austin and Dallas. Houston is fucked  Dell should do a corp inversion to take thsi to a new level . Dell who is Fucking Dell Corp? 

Déjà view I am Jobe Sat, 06/10/2017 - 02:02 Permalink

Additionally...78 COMPADRES...

Debt is also growing rapidly among the state’s 81 retirement systems for local-government workers. Not only are these systems poorly funded; it isn’t even clear how much some owe, since they haven’t disclosed the financial information necessary to verify their financial position, even to state oversight officials. After an extensive survey of municipal pension systems, Combs determined that none of the local plans was fully funded and that only 19 percent had 80 percent of the funds on hand to meet future obligations. 
http://www.city-journal.org/html/deep-debt-texas-13556.html

One does NOT want to hang around when these Debts Of Massive Destruction hit...

CABs generally offer longer terms than conventional bonds, allowing investors to reap a greater amount of compounded interest over time — and allowing borrowers to defer debt service payments for decades. CABs allow school districts to "build now, pay later" — "later" being many years down the road, when the tax base may have grown enough to make repayment less of a burden. Some districts may set aside money along the way to ease the burden when their CABs reach maturity.

Overreliance on CABs, however, can be costly for school districts when the eventual lump-sum payments become due. According to Texas Bond Review Board (BRB) data, as of the end of fiscal 2014 Forney ISD had issued four of the 20 most expensive CABs outstanding for Texas school districts. For just under $30 million in immediate funding, the district will have to repay more than $208 million when the bonds reach maturity in 30 to 40 years.
https://comptroller.texas.gov/economy/fiscal-notes/2016/march/cab.php

Btw...'Loan' Star State of Tejas stands behind most local debt...GOING TO AFFECT ALL TEJAS TAX'PLAYERS'

In reply to by I am Jobe

montresor Fri, 06/09/2017 - 15:50 Permalink

Notice how California had a 0.1% differential.. That's because California collects all the taxes on the front end in the form of fees, permits, application cost, registration, licensure, you name it, California has a fee slapped on it.. It costs $800 a year in California just to have a domestic corporation OR and LLC! So with their Stalinist, Maoist boot on everyone's neck, California is squeezing the guts out of every mom & pop, every one man business, every barber, dog walker, plumber, electrician, paver, mason, carpenter; every one of those guys who dares to try to support himself in California, without the assistance of the Democratic party, gets clipped.. An envelope with $800 in it Johnny nobody gives a fuck if you turn a dime or not.. It's fuck you, pay me in California.. And that's why California came in at 0.1% on this guy's chart.. 

VK Fri, 06/09/2017 - 15:43 Permalink

Who needs taxes when you can print from your friendly G3 central banks to the tune of 300 Bn usd a month. Print Mooooar!

Mazzy Fri, 06/09/2017 - 16:22 Permalink

Looks like energy sector (Wyoming, Texas, North Dakota, West Virginia, Oklahoma), Communism (Illinois, New York), and....who lives in Mississippi anymore?

SmittyinLA Fri, 06/09/2017 - 16:22 Permalink

The carbon tax handicap and industrial tech and export model has its limitations, eventually you run out of assets to sell for food.

Even rents have to be paid with something other than hope and change.

SmittyinLA Fri, 06/09/2017 - 16:28 Permalink

Funny, Nevada is eating California's breakfast lunch and dinner while also supporting a Mexican invasion, California is in a Communist annihilation funded by feds

Give Me Some Truth Fri, 06/09/2017 - 16:34 Permalink

There are fewer people working (and the people who are working are working fewer hours) so payroll tax receipts are going down. All of the people who have "dropped out of the labor force" aren't paying taxes. We are told that unemployment is falling - dramatically at that. If this were the case, tax receipts would be increasing, even significantly. It's a lie.On the other hand, capital gains tax receipts from the sales of stocks and homes are no doubt increasing, offsetting the decline in payroll tax receipts. It seems to be hard to get precise data on capital gains tax receipts YoY for some inexplicable reason. Anyway, I never see this figure reported.

hardmedicine Fri, 06/09/2017 - 17:28 Permalink

that's why we are staying SMALL.  small house, small car, shut down the business.  Making as little as we can so there is less to tax.  I'll go back to caring when the income tax is either abolished or at least cut in half

uhland62 hardmedicine Fri, 06/09/2017 - 23:54 Permalink

The article is more about corporate tax. Anybody who pays that is a fool because it can be avoided by let the corporation reside in a tax haven; plenty of sun and beaches there. And there's no expat tax for corporations!!!When the government needs money for the military they can try to tax the little guy, but since there's less to be had these days from low wages, just put it on the credit card. It's already looking great, the house built with credit cards. 

In reply to by hardmedicine

Muppet Sun, 06/11/2017 - 01:45 Permalink

Property tax.  The greatest reason why State and especially Federal tax receipts are crashing.   Citizens simply exempt their property tax, which is crashing taxable income.Property tax is the single most important reason causing taxable income and tax receipts to crash at the State and especially Federal level..  The Federal government desperately needs to reign in (and maybe outlaw) property tax.  Property tax is diverting and stealing all the tax dollars.