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Local income taxes - impact of filing deadline extension and supplemental distributions

With the recent delay in the filing date for state and local income taxes, we wanted to share a reminder on how the timing of filings impacts distributions and also discuss the supplemental income tax distributions many units will be receiving in the near future.

Income tax timing

The certified distributions for a given year are based on economic activity that occurred two years prior which are then included in the income tax filings in the year prior to the distribution.  This can be more easily understood by showing the actual timing for a given distribution year. For the 2021 certified distributions:

  • Income generated during 2019 and the associated income taxes paid on it are the basis for 2021 calculation
  • Tax returns filed and processed from July 1, 2019 - June 30, 2020 are used to calculate the 2021 distributions
  • State certifies the distribution by October 1, 2020 and revenues are distributed throughout 2021

Due to the income tax filing deadline being extended from April 15th to July 15th the impact on local income tax distributions could start to be felt in 2021 as opposed to 2022.  This is because some filings will not be processed until after the cutoff date for the calculation of the 2021 distributions.

In addition, 2022 distributions will be impacted by less income being earned (and related taxes generated) with the slowdown in the economy caused by the COVID-19 mitigation efforts in 2020 which will be reflected on the April 15, 2021 tax filings used to calculate the 2022 certification.

One potential offset for the 2022 certifications, is for those taxpayers who take advantage of the delayed tax filing due date in 2020 could have both of their filings included in the 2022 distribution calculation, thereby offsetting some of the other decreases in 2022 caused by reduced economic activity in 2020.  The magnitude of this shift and potential offset is unable to be determined at this time.

If this ends up being a short-term slowdown and the economy recovers within months, then the reduction or reduced growth rate in income tax revenues could be an impact felt over a couple of years.  However, if the economic slowdown lasts for years rather than months, then the related impact on local income tax revenues will also last longer.

Supplemental distributions

Income taxes generated within a county are deposited in a Trust Account maintained by the State Budget Agency (“SBA”). If a county’s trust balance exceeds 15% of the certified distributions for the current year, then the SBA is required to make a supplemental distribution in excess of the 15% balance.  This supplemental distribution is allocated to the taxing units the same as the certified distributions and will be distributed in May to those who are eligible. Based on the SBA information, approximately 75% of counties will be getting a supplemental distribution this year. 

This supplemental distribution may provide some a means to fund a desired project or given our current situation, provide funds for an unanticipated financial cost. These funds may be a means to temporarily fund a shortfall or offset a property tax timing issue and once replenished could be helpful for future budgetary pressures. It is also prudent to consider maintaining a portion of this distribution for future years as well. As mentioned above, distributions are likely to be diminished over the next couple of years and that also means supplemental distributions will follow a similar path.

If you have questions about developing a plan for your short and long term needs or need assistance in estimating the distribution for your community, please contact our team.

Brian Colton
Principal
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