Federal Tax Policy Uncertainty and State Revenue Estimates

April is the most important month of the year for individuals who owe federal and state income taxes and for governments that rely on income taxes as a major source of revenue. Because personal income tax receipts account for about 45 percent of federal government receipts and more than 33 percent of state tax revenue, what happens in April has a major impact on these governments’ fiscal positions and their ability to provide services through the end of the year. While the final payments are always a surprise, the past two Aprils produced even larger surprises than usual. A confluence of events in 2012 compounded the normal uncertainty in 2013 and 2014. This brief examines how timing of events like the fiscal cliff affects state budget outlooks and how state economists grapple with uncertain federal policy affecting income tax revenue.