The Office of the Comptroller released its detail of the August distribution of local income taxes.  According to the August message, the August distribution totaled $ 97.8 million (Table 1), a decrease of 23.3% compared to last year, but as further explained below, this is a result of the formula used to estimate distributions, not poor revenue collections.

The August distribution is composed of two reconciling distributions:

• The balance of second quarter 2015 withholding and estimated payments; and
• The second reconciling distribution for tax year 2014.

The second quarter balance distribution decreased by 28.7%, to $76.5 million (Table 2) . From the electronic message,

It is important to note that the decrease in this distribution is not indicative of poor revenue collections, it is simply a function of estimates and reconciliations this year relative to the prior; the second quarter actually looks relatively strong with growth of 5.8%.

Since this is the last quarterly distribution to be completed with the percentages derived from tax year 2013 returns, it is worth repeating the possibility that wealthy counties might have been underrepresented in the formulas derived from tax year 2013 tax returns. This is, of course, related to the fiscal cliff, an event that had a greater impact on counties with taxpayers more likely to own capital and have non-wage income. To recap, income was pulled into tax year 2012 to hedge against federal tax policy uncertainty. Some amount of that income was very likely pulled forward from future tax years, particularly tax year 2013. As such, counties with a disproportionate share of taxpayers “affected” by the fiscal cliff likely had, all else equal, a smaller than normal share of the pie for tax year 2013. Therefore, assuming the prior scenario is accurate and that income recognition returns to “normal” patterns, the distribution for third quarter payments would look very different at the county level.

The 2014 second reconciling distribution totals $21.3 million (Table 3).

The tax year 2014 is the second reconciling distribution for that year, reflecting returns posted to the tax processing system by June 30, 2015. 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 Jim Pasko of the Revenue Administration Division at (410) 260-7521 or Jason Brohawn at (410) 260-6159.

A history of the local income tax distributions to local governments can be found on the Office of the Comptroller’s website.