State and Local Tax Woes Will Likely Increase Audit Activities
September 24, 2009
A recent in-depth study* of state tax revenue trends by the Nelson A. Rockefeller Institute of Government (Rockefeller Study) concluded the recent drop in state tax collections is the largest decrease in 50 years.
While this news may be music to the ears of business owners and individuals who feel over-taxed, a closer look at the statistics and consideration of the longer term impact of this trend, both corporate and individual taxpayers will likely be facing more state-level audits and higher fees and taxes in the coming years in order to bridge these widening state budget deficits.
Based on the Rockefeller Study, 35 states experienced drops in tax collections during the fourth calendar quarter of 2008. After factoring in inflation, legislative changes and other adjustments, 42 states actually experienced decreases in 2008 tax collections. Only the Plain State region did not experience a downturn. The four percent decrease (6.1% after adjusting for inflation, legislative changes and other adjustments) in year-to-year tax receipts is broken down as follows: 1.1 percent fall-off in individual income tax receipts, 6.1 percent less sales tax collections and a whopping 15.5 percent reduction in corporate income tax receipts.
None of these tax collection reductions should come as a great surprise based on the economic chaos over the past two years. The fall-off in estimated tax payments accelerated at a rapid pace. For the 2008 calendar year, estimated income tax payments made between April and January decreased on average in all states by 3.5 percent, but fell even more precipitously in the fourth quarter to an average of 13.8 percent — apparently as taxpayers realized that their financial results were even worse than expected in prior quarters. California, Hawaii and Massachusetts all saw fourth quarter reductions of nearly 30 percent or more. Iowa, Louisiana and Wyoming and West Virginia were the only states with fourth quarter increases — likely attributable to strong sector results for the year such as natural resources.
The start of 2009 continued the negative trend with an overall decline of state tax revenue collections of more than 12 percent. Even with some minor signs of recovery, the year-to-date drop in auto sales, home construction and property values, coupled with skyrocketing unemployment and business closures does not bode well for calendar 2009 tax receipts.
This state landscape is compounded by claw-backs from the federal government as a result of the federal deficit problems. Therefore, this perfect economic storm of lower consumer spending (reduced sales tax receipts), reduced real estate values (reduced property tax receipts) and contracting businesses and high unemployment (reduced corporate and individual, respectively, income tax receipts) compounded by reduced federal allocations, are producing unprecedented pressure on state government cash flows.
The reaction of state officials to counteract the severe drop off in tax receipts includes the following:
Since state and local taxes are often based on a base other than federal taxable income, they can comprise a significant portion of total taxes and a relatively large percentage of the operating costs for any business. Due to the trickle-down effect of the federal and state budget process, these trends are occurring at not just the state level, but also at the county and local levels. Therefore, CFOs, tax directors and controllers need to be focusing their attention on state and local tax matters to ensure that they are legitimately minimizing their state and local taxes by making sure that they are:
Since many state and local tax jurisdictions provide tax exemptions, tax holidays, tax credits, grants and other incentives, it is critically important for taxpayers and their CPAs to spend time evaluating the state-by-state and local tax incentives.
These significant tax benefits fall into a number of categories which should be fully explored:
A variety of detailed information on these subjects is available by performing keyword searches with your tax research software and/or Google searches.
As discussed in a State Tax Burden, the state and local tax burden can be very significant — even for unprofitable companies. Therefore, time invested in ensuring that state and local taxes are not overpaid can produce significant refunds and long term benefits to companies and their equity holders.
In light of these challenging economic times and the significant impact of state and local burdens and benefits, tax advisors can add significant value to the bottom line by fully evaluating the aforementioned SALT strategies for their employers or clients. Favorable results, including refunds, can enhance your reputation and job security with your employer or clients.
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