Data Alert 

March 6, 2013

Good News or False Hopes? State Tax Revenues Showed Strong Growth in the Fourth Quarter of 2012

Lucy Dadayan

Preliminary data for the October-December quarter of 2012 show continued growth in overall state tax collections, including income and sales tax revenues. The growth in total tax collections was the strongest in the last six quarters, mostly driven by the strong growth of 10.8 percent in personal income tax collections.

The rapid income tax growth in the fourth quarter is consistent with the caution in the most recent State Revenue Report: “Year-end actions by taxpayers to minimize their expected federal tax liability in light of the 'fiscal cliff' and federal actions to avert the cliff are likely to boost state income taxes in the October-December quarter and in the first and second quarters of 2013, lifting state tax revenue in the 2012-13 state fiscal year. However, these year-end actions are likely to depress state income tax revenue slightly in 2013-14 state fiscal years.… States are on a revenue roller coaster, and there is a bumpy ride ahead. It will be hard for states to interpret revenue data in coming months, and hard to rule out the possibility that any short-run revenue surge is simply borrowed from the future. It will be tempting to treat unexpected revenue growth as a sign of continuing economic improvement, when it could mean instead that future revenue will be lower. Caution should be the watchword.” (See Lucy Dadayan and Donald J. Boyd, “State Tax Revenues Continue Slow Rebound,” State Revenue Report, The Rockefeller Institute of Government, February 2013.)

We will provide a full report on the October-December period after the Census Bureau’s data for the quarter are available.

The Rockefeller Institute's compilation of preliminary data from 48 states shows that collections from major tax sources increased by 5.7 in nominal terms in the fourth quarter of 2012 compared to the same quarter of 2011. Tax collections have now risen continuously for the last three calendar years. This growth followed five quarters of declines brought on by the Great Recession. 

Among 48 early reporting states, 45 states reported gains while three states reported declines in total tax revenue collections during the fourth quarter of 2012. Personal income taxes grew by 10.8 percent. Sales taxes growth was relatively weak at 2.2 percent, and corporate income taxes fell by 4.1 percent. (See Table 1 for national-level changes in revenues since 2007.)

Table 2 shows state-by-state changes in major tax revenues during the fourth quarter of 2012 compared to the same quarter a year earlier. Delaware and Hawaii reported the largest increases in overall tax collections, at 14.6 and 13.4 percent, respectively. In addition to these two states reporting double-digit growth in total tax collections, another five states also indicated double-digit growth in overall tax collections.

Overall, state tax revenues have been continuously recovering for the last three years. However, state fiscal revenue recovery has been much slower and prolonged compared to historic averages, and is still far from full recovery. While state tax revenues have shown a relatively strong growth in the fourth quarter of calendar 2012, that is likely not an indication of improvement in state revenues. As discussed in the Rockefeller Institute’s State Revenue Report dated February 2013, the strong growth in personal income tax collections is mostly attributable to taxpayers’ efforts to shift income from 2013 to 2012 in order to avoid paying higher income rates in 2013 as a result of the American Taxpayer Relief Act. Therefore, state officials should take an extra caution when interpreting the growth in income tax collections.

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