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Research Announcement:

Moody's - Reliance on top earners could expose states and downstream entities to revenue volatility

20 March 2019

New York, March 20, 2019 --

- In California, Connecticut, New Jersey and New York a large share of revenue is derived from a small minority of the population

- If revenue declines, raising taxes may prove difficult, given 2017 federal tax law changes and 2009 tax increases in California, Connecticut, New Jersey and New York

Dependence on the highest earners for a sizable portion of tax revenue can leave high-income states like California, Connecticut, New Jersey and New York vulnerable to volatility in these earners' income, Moody's Investors Service says in a new report. Since the Great Recession, tax increases enacted in these states have fallen predominantly on the highest earners, while their budgets have also become more reliant on personal income taxes.

"Tax increases enacted by California, Connecticut, New Jersey and New York could increase revenue volatility because they fall predominantly on the highest-income taxpayers, whose earnings tend to be volatile," says Matthew Butler, a Moody's VP-Senior Analyst.

Residents of these four states who earn more than $500,000 a year typically account for more than 40% of each state's personal income taxes, but comprise only 1.2% of taxpayers in California and 2.8% in New York, Butler says. The states' income tax bases are more concentrated than those of states that are more dependent on income taxes. For example, income taxes usually make up at least 85% of Oregon's annual revenue, but just 0.6% of taxpayers there earn more than $500,000 and that group accounts for a more modest 18% of total annual personal income taxes.

States have broad powers to balance their budgets in the event of large revenue declines, Moody's says. While budget reserves are available to bridge a period of revenue loss, governments can also cut funding to downstream entities such as municipalities, school districts, and public colleges and universities. But raising taxes may prove difficult, particularly in the wake of the 2017 federal tax law changes, while tax increases in California, Connecticut, New Jersey and New York after 2009 could make it harder to raise taxes again in those states.

Among a sample of states that are highly dependent on income taxes, California stands out in terms of volatility in both personal income taxes and general fund revenue. Connecticut and New Jersey are less reliant on personal income taxes to fund state government, while New York's lower volatility stems in large part from a tax increase instituted just before the effects of the 2007-09 recession began to kick in.

Subscribers can access this report, "State and local government - US: Reliance on top earners exposes states and downstream entitles to revenue volatility," at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1145127.

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Matthew Butler
VP-Senior Analyst
Project & Infrastructure Finance
Moody's Investors Service, Inc.
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

Timothy Blake
MD-Public Finance
Project & Infrastructure Finance
Moody's Investors Service, Inc.
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

Releasing Office :
Moody's Investors Service, Inc.
250 Greenwich Street
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U.S.A.
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

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