Jim Dey | Capital gains downturn complicating Capitol gains on budget


Illinois’ economy continued to grow in April, although at a slower pace than the previous month of March.

At the same time, the state’s unemployment rate was a very respectable 4.5 percent, far lower than during the coronavirus-driven recession period of two years ago.

Given those relatively strong signs — people are working and spending — why did state income-tax revenues fall out of bed in April 2023 as compared with April 2022?

Further, what, if anything, does the revenue decline mean for the remainder of the state’s current 2022-’23 fiscal year and the new one that begins July 1?

To provide an answer, staffers at the legislature’s Commission on Government Forecasting and Accountability point to a relatively straightforward measure.

The stock market was strong in 2021, driving tax payments up in April 2022, and pretty much the opposite in 2022, resulting in lower tax payments in April 2023.

Put another way, Illinois’ taxpayers, largely as a result of the strong 2021 year, made significant capital gains profits from mutual funds and stock purchases that were reflected in tax returns filed in 2022.

Conversely, the lousy market year of 2022 produced a dramatic decline in capital gains tax payments when taxpayers filed their returns by the April 15 deadline.

How much of a decline in capital gains payments? Commission analysts said “the specifics of the April receipts” have not yet been determined, but that past revenue flows indicate reduced capital gains revenues demonstrate the problem.

Personal income-tax payments fell from $5.4 billion in April 2022 to $3.6 billion in April 2023, a decline of $1.7 billion. The $5.4 billion in 2022 was a nearly 100 percent increase over April 2021.

April 2023 revenues were still strong, the second-highest monthly revenue total recorded. That’s a good sign for the overall economy, but the sharp decline in capital gains revenue provides one more reason not to conflate the economy with the stock market.

A capital gains tax is paid on the profit from the sale of an asset, like a stock, bond or real estate.

If an investor buys 100 shares of a stock for $20 a share and sells them for $30 a share, the investor owes state and federal taxes on the $1,000 profit. Tax rates vary based on how long the investor owned the stock before selling.

One barometer of stock-market performance is the Dow Jones Industrial Average, an index of 30 blue-chip stocks that is supposed to reflect the broader U.S. economy.

In 2021, the Dow opened the year at 30,000 and closed at 36,000, a 20 percent gain.

In 2022, the Dow opened the year at 36,000 and closed at 33,000, a drop of nearly 10 percent.

On Monday, the Dow stood at 33,600, up marginally during the first four months of 2023. If that pace continues through the year, capital gains revenue will continue to be disappointing for revenue-hungry state officials.

Although Gov. J.B. Pritzker’s proposed FY 2023-24 budget approaches $50 billion, that number is within budget projections even in the face of the decline in income-tax revenue. But it remains to be seen if the capital gains decline foreshadows bigger revenue problems ahead.

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May 10, 2023 at 06:59AM

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