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Shifting the due date for income tax filings to July from April will likely create some budget gaps that states will have to manage in the final months of their fiscal years.
Following the federal government’s lead, most states are delaying their income tax filing deadlines to help provide taxpayers some relief and flexibility amid the coronavirus crisis.
The move promises to shift the timing of when large portions of tax revenue flow into state coffers, pushing it from the spring into the summer, and beyond the close of the current fiscal year for many places. This means income tax collections are likely to fall short of budgeted levels in some states during the final months of fiscal 2020, resulting in gaps between planned spending and revenues.
Lucy Dadayan, a researcher with the Urban-Brookings Tax Policy Center who focuses on state-level tax and economic issues, explained that states will still likely see most of the income tax revenues that they had banked on collecting. “But it's just going to be for the next fiscal year,” she said, “which will leave some holes in state budgets.”
Moody’s Investors Service said in a brief last week that income tax receipts in April, May and June together tend to account for just over a third of annual state income tax collections.
Last week, the ratings agency said that most states will be able to deal with the shift in the income tax filing date without running into major trouble. States are apt to do so, Moody’s says, by tapping reserves, slowing spending, or with short-term borrowing.
The massive federal stimulus package President Trump signed into law last week may also provide some help.
That said, the shifted tax deadline is yet another wrench in the fiscal-works for states as they navigate a historic disease outbreak and the huge economic downturn that has come with it.
State governments are facing a range of financial uncertainties related to the virus, as it is unclear how badly sales taxes and other revenues will tank, how much the public health response will cost, and how extreme the toll will be for state unemployment trust funds.
“It's not just that they have to deal with income tax,” Dadayan noted.
The shift in tax collections could especially be a headache for states that entered into the public health crisis with existing budget woes.
Illinois, for instance, has struggled with a huge unpaid bill backlog, is saddled with massive pension liabilities and has maintained a relatively paltry “rainy day” fund balance—about $60,000, State Comptroller Susana Mendoza’s office said in mid-February.
The state announced last week that it would extend its income tax filing deadline to July 15, from April 15. “Postponing the state tax filing deadline will be a challenge to the state and our office’s cash-management duties,” Mendoza said in a statement.
“But it is a responsibility we are prepared to meet,” she added.
Mendoza noted that April is normally the top revenue month for Illinois. Cashflows then help the state to cover bills from less lucrative months, such as February. Mendoza pledged, however, that the state would continue to make payments for debt service, payroll, K-12 schools, social and human services, and pension contributions.
Last year, 41 states levied broad-based individual income taxes. Figures that the Tax Policy Center analyzed for 2016 show that these taxes provided about $344 billion, or roughly 18%, of state general revenues during that year.
Dadayan said that, as of March 25, at least 28 states and the District of Columbia had shifted their income tax due date to July 15. The Internal Revenue Service and the Treasury Department said earlier this month that the federal income tax filing due date would be automatically extended to this date, from the usual April 15 deadline.
Four other states—Mississippi, Idaho, Hawaii and Iowa—have moved out their deadlines to other dates in May, June or July. And Oklahoma and Virginia set dates of July 15 and June 1 respectively for payment obligations only, not filing, according to Dadayan.
Forty-six states will begin fiscal year 2021 on July 1, 2020, according to the National Conference of State Legislatures.
Michigan Gov. Gretchen Whitmer signed an executive order on Friday to move the state’s income tax deadline to July 15 from April 15. The order pushes the filing deadline for city income taxes into July as well. “Michiganders shouldn’t have to worry about filing their income taxes in the midst of a global pandemic,” Whitmer said.
Despite the shift, the state’s treasurer, Rachael Eubanks, urged people who are eligible for tax refunds to file sooner, rather than later.
The Moody’s brief points out that California, which has moved to the July 15 tax filing due date, is heavily dependent on personal income tax revenue, particularly from higher earners. It adds that a current state forecast estimates that about 37% of full-year income tax revenue was expected between April and June.
But the ratings agency also said that income tax revenues were up in California through February, and that the state has healthy budget reserves and other available funds that would help provide a solid buffer as it deals with the expected shift in income tax revenues.