November 5, 2014

Income Tax’s Unpredictability a Problem

Income tax has become an unsteady revenue source for states in the last several years, according to Stateline. Middle-class wages have remained the same but upper-class incomes have jumped. The fact that the higher incomes are more affected by stock market fluctuations can lead the amount of income tax paid by the highest earners to vary substantially from year to year.

The more reliant a state is on income tax, the more reliant it is on its wealthiest residents and the performance of the stock market. Connecticut, according to a report from Standard and Poor’s, is the third-most reliant on income tax.

One step states can take, according to Stateline, is to save money in reserve funds. The article points out that Connecticut’s rainy day fund is at about $400 million.

States should also closely examine “the causes of volatility and revise revenue forecasts as close to the final passage of the state budget as possible, while planning for possible shortfalls or surpluses.”