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States get unexpected tax windfalls

What's up with all this surprise tax money?

Woman with money First U.S. Treasury Secretary Timothy Geithner announces that his office found enough additional tax money found to delay the country's default until Aug. 2.

Then cash-strapped states started discovering extra tax money.

Michigan says it has $429 million more than expected.

Kansas has an unexpected $22 million surplus.

New Jersey's treasury is surprisingly $913.4 million fatter.

Massachusetts' tax take is $580 million above expected estimates.

And now California, the poster-child for state budget troubles, reports that California tax receipts through April 30 were $2 billion above forecasts, leading to a a projected revenue windfall that's $6.6 billion beyond expectations.

Golden State finance officials attribute the unexpected money to a sharp increase in earnings of the wealthy, who pay tax rates much higher than those of average Californians.

But what's the deal with the other states and the found money? Does this mean that the economies there are picking up, that more people are working and paying taxes?

It will take some time to pinpoint the reasons for the excess funds, but in the meantime, state officials lucky enough to discover such windfalls aren't questioning the extra money.

They're just fighting about what to do with it.

And the state-level budget debates sound a lot like the fighting pontificating screaming discussions going on in the halls of Congress.    

California Gov. Jerry Brown, a Democrat, is pushing for tax increases, while Republican lawmakers are pointing to the revenue surge as another reason to block that move.

Michigan lawmakers have found some common ground. There appears to be agreement that at least part of the surprise surplus should go to education this coming school year. But just how much, and what education cuts will remain, is a sticking point.

And in New Jersey, election-minded lawmakers on both sides of the political aisle are jockeying for ways to provide taxpaying voters with property tax relief.

Has your state been as financially lucky of late? If so, what do you want your lawmakers to do with the extra tax money?

State by state collectiona amounts: The U.S. Census' 2010 Survey of State Government Tax Collections gives us an idea of how much money each state raked in last year.

The data program lists the states in order of collection amount. Of the almost $705 billion in taxes taken in last year, California was first; South Dakota came in 50th.

You also can see your state's breakout of tax and fee collections by category.

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Great points, Mary. I think you're right, it's investors now carrying a lot of the load because of tax timing issues.

Mary OKeeffe

Thanks for pointing out this really interesting pattern. It will bear close watching.

My theory: high-income taxpayers can see the "writing on the wall," and are doing what they can to prepay their future federal tax liabilities at the current bargain rates.

So, for example, they are realizing their capital gains now, rather than later when they might be taxed at considerably higher federal rates. This has a magnified impact on state tax revenues in a state like ours (New York), because capital gains are taxed as ordinary income at the state level.

In addition, of course, many high income taxpayers were able to convert their traditional IRAs to Roth's for the first time ever in 2010. Although they had the option to defer paying those taxes until their 2011 and 2012 returns, some may have wanted to be conservative and pay the tax on the conversion amount when they could be sure of the rates, rather than taking a gamble on what might happen in 2011 and 2012.

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