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In a blog item posted in early February, DOR noted that capital gains appeared to be a growing source of state revenue. That appears now to have been a bit of understatement.

In numbers released today, DOR reports that the April revenue collection of $2.505 billion — $587 million over benchmark and $758 million more than a year ago — "was largely due to payments with income tax returns and extensions generated by larger than expected investment-related income which produced higher than forecast revenues from taxes due on interest and dividends and capital gains."

Thanks to Capital One pitchman Jerry Stiller, we know that interest income is bupkis. So the real driver here is capital gains, a notoriously volatile source of revenue. An oversimplified explanation of what happened in April is this: Wealthy individuals decided in 2010 to dip into their investments, which created gains, which creates capital gains revenue in 2011 when taxes are due for 2010.

Volatility in capital gains is real. In FY09, capital gains revenue declined about $1.7 billion from FY08, which is a major reason why revenue collections dropped from $20.88 billion in FY08 to $18.259 billion in FY09. That was falling off the revenue cliff, and the state has yet to fully recover.

When DOR first saw a renewal in capital gains in January, economists theorized that the increase was due to taxpayers who were uncertain whether the Bush tax cuts would be eliminated last Dec. 31, which would have increased the capital gains federal tax rate from 15 percent to 35 percent; and who as a result chose to cash in investments to take advantage of the lower rate. It is also possible that wealthy taxpayers were feeling better about the overall economy and as a result decided to start cashing in on gains and spending some of their assets. 

Whatever the reason, income tax payments with returns and extensions totaled more than $1.5 billion in April, up about $650 million from a year ago.

While capital gains tax revenue skyrocketed in April, there was also an $80 million increase in withholding taxes which reflects underlying strength in the economy apart from capital gains.

Collections for year are now close to $2 billion more than at the same time a year ago, with two months to go in the fiscal year.

 

 

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