State pinched by decline in corporate tax revenues

The state is starting to feel the pinch as corporate income tax revenues tumble down, which budget analysts say is the result of tax cuts being phased in.

The tax cuts were enacted in the middle of the last recession and were meant to better position the state as a business hub once economic recovery starts.

State revenues dipped in December when compared to the year before. Analysts say the culprit is a dramatic decline in corporate income taxes, which dropped by 45.8 percent. They also came in at $30.1 million below budget expectations.

Total collections for the month were 4.8 percent lower than last year, although the actual dollar amount came in at $2.1 million above budget.

The news isn’t surprising. Budget analysts have anticipated a decline in corporate income collections as tax cuts are phased in.

What’s surprising, however, was it took this long to see the drop in corporate income taxes.

“The large decline in the tax category is an indication that the state may finally be experiencing the revenue loss from the corporate tax reductions that began to be phased in on January 1, 2014,” the Joint Legislative Budget Committee said in its report for December.

Budget analysts estimated that corporate tax cuts being phased in over the next three fiscal years, starting in FY2017, would lower the state’s revenue base by $261 million.

Gov. Doug Ducey has promised more tax cuts this year and beyond.

The Legislature’s budget research arm explained that corporate returns are filed in April, but larger corporations usually get a six-month extension. That means large companies file their returns in October.

“It appears the state is now realizing a portion of the revenue loss from the tax reductions,” JLBC said.

The evidence can be glimpsed in the corporate refunds this December, which, at $50 million, was roughly $31 million higher than the refunds for the same period last year.

The most worrying part of JLBC’s report is that the state’s core revenue sources – sales and withholding income taxes – showed dismal growth.

Sales tax collections increased by only 1.1 percent, while withholding income taxes dipped to negative 1.1 percent.

Sales tax collections have been consistently less than stellar throughout 2015, although December posted the second lowest for the calendar year. Sales tax collections last June only grew by 0.1 percent.