August Income Tax Distribution Up, Largely Tied to Percentage Changes in Distribution Formula

According to the Comptroller’s electronic message, the August distribution of local income taxes totals $95.8 million, a 40% increase for the second consecutive year. While this increase may seem signficant, it is largely being driven by the percentages used in the distribution formula.  The percentages used in the formula are reset every year for the November distribution. This is done by seeing what the actual amount collected of the  total was,  based on the previous year’s tax liability using actual  returns received by November. Tax year 2010 percentages are now in use.

This process works well when there is little change in the percentages used from year to year. However, the last few years have been very volatile and the formula percentages have changed quite a bit.  These formula changes have created an overstating of revenues which could result in reductions when the formula is reset for the 2011 tax year.

The August distribution is composed of two reconciling distributions 1) the balance of second quarter 2012 withholding and estimated payments; and 2) the final distribution for tax year 2011.  From the message:

The second quarter balance distribution is based on withholding and estimated tax collections attributable to the second quarter of 2012 less amounts already distributed (projected April/May withholding and estimated payments distributed in June and projected June withholding distributed in July).  This component of the distribution is effectively one-third of projected estimated payments for the second quarter, and a reconciliation of actual withholding and actual estimated payments for the entire quarter to projections from May and June.  This distribution was nearly flat at $55.8 million.

Additional tables detail the quarterly distribution  and the aggregated second quarter distributions by county.  Statewide, the increase for the full quarter was 5.6%, well in excess of the 1.6% growth in total
receipts.  The difference between growth in the distribution and growth in total receipts has been expected in each quarterly distribution since tax year 2010 percentages were put into use last November.

The tax year 2011 final distribution is the second reconciling distribution for that year, reflecting returns posted to the tax processing system by June 30, 2012.  The final distribution totals $40.0 million, an increase of nearly 200%.  This distribution is among the most volatile, since it is a reconciling distribution that accounts for returns processed over a three-week period.

If you have any questions about the August distribution, please contact Bill Blum of the Revenue Administration Division at (410)260-7501.

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