NCPA - National Center for Policy Analysis

States May Face Fiscal Pain As Revenue From Capital Gains Drops

May 14, 2001

The 1990s bull market swelled many states' coffers, as investors paid capital gains taxes and employees paid income taxes on their stock-option windfalls. But the recent drop in stock prices has led to a decline in such revenues and some states are finding their budgets pinched.

  • Officials in 34 states have detected some sort of revenue shortfall this year -- with California being the hardest hit.
  • Lawmakers have been forced to consider curtailing spending on a wide range of programs -- and some scheduled tax cuts could be trimmed or delayed.
  • Yet states have gone into the economic downturn with surpluses or budget reserves of 8 percent to 9 percent of annual revenue, on average, compared with 4 percent to 5 percent at the start of the 1990-91 recession, says Renee Boicourt of Moody's Investors Service.
  • Projecting taxes on stock transactions is notoriously difficult because it involves trying to guess future market trends.

These factors have some experts convinced that states won't be hurt as much as they fear.

The Congressional Budget Office expects federal tax revenue on all types of capital gains to decline only gradually -- from this fiscal year's $129 billion to $106 billion in 2007.

Source: Scott Thurm and Mitchel Benson, "Weak Stock Market Is Beginning to Pinch Some States' Budgets," Wall Street Journal, May 14, 2001.

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