NEW YORK (Reuters) - U.S. state government tax revenues rose 3.1 percent in the third quarter of 2017, boosted by high-income taxpayers pre-paying portions of their state and local taxes in anticipation of the new tax law, according to a report issued on Monday.
The rise in total collected taxes exceeded the average quarterly growth rate of 2.1 percent for the previous four quarters, according to the report by the Rockefeller Institute of Government.
The growth was driven by increases in personal income tax revenues, a trend expected to continue into the fourth quarter of 2017, according to the institute, the public policy research arm of the State University of New York.
“The strong growth in state tax revenues in the final quarter of 2017 may only be temporary given that it is partially attributable to the passage of the Tax Cuts and Jobs Act (TCJA),” the report said.
Signed into law in December, the new law introduced a cap on deductions for state and local taxes, known as SALT, at $10,000. As a result, many high-income taxpayers pre-paid portions of their 2018 tax bills in order to take advantage of the diminishing tax break.
While tax collections overall were higher in the third quarter, the report highlights sales tax revenue growth as being sluggish.
Preliminary fourth quarter data indicates growth in personal income taxes at 16.6 percent and growth in sales tax collections at 6.9 percent, contributing to the largest gain in state tax revenues in the decade since the Great Recession.
Fluctuations in tax collection is expected ahead as both states and taxpayers navigate around provisions in the new tax law.
“We expect weaker growth in state tax revenues in the first quarter of 2018 and likely declines in the second quarter of 2018, again as a result of the passage of the TCJA,” the study said.
Local governments fared better than state governments in the third quarter, with tax revenues up 4.1 percent, compared with 3.2 percent average growth in the prior four quarters. The increase stemmed largely from strong growth in sales taxes as well as continuous growth in property taxes.
Variations in tax collection persisted on a regional basis. The report highlighted that most states west of the Mississippi River reported stronger growth in the third quarter while states east of the river had weaker growth or even declines. However, overall there were fewer states that saw declines in revenue throughout 2017 versus the prior year.
Reporting by Reade Levinson; Editing by Daniel Bases and Leslie Adler