News Release: State Budget Cuts May Lie Ahead As Tax Revenues Across U.S. Weaken Yet Again

For Immediate Release –

July 1, 2008

Media contact: Mark Marchand – (518) 443-5283 / marchanm@rockinst.org

State Budget Cuts May Lie Ahead As Tax Revenues Across U.S. Weaken Yet Again

Cost Inflation for States, Localities Remains High

Albany, N.Y. — The Rockefeller Institute of Government’s latest quarterly report on state tax revenues across the country shows continued weakening during the first quarter of 2008, with an increase of only 1.7 percent compared to the same quarter a year earlier — the slowest growth rate since 2003.

When adjusted for inflation in the cost of government purchases as well as legislated tax changes, state tax revenues declined by 5.3 percent — the third quarter in a row that total adjusted state revenues showed a decline. In addition, for the first time in six years, sales tax collections — one of the largest components of state tax revenues — were flat, showing no growth. Over the past 37 quarters, sales tax collections on average grew 4.4 percent year-over-year.

Total growth in state tax revenue was barely one-third the historical average over the previous nine years of 4.9 percent. Fifteen states saw revenue declines during the quarter, compared to the same quarter a year earlier.

“To date, the tax revenue weakness has been mild when compared with past recessions,” said Rockefeller Institute Senior Fellow and study co-author Don Boyd. “However, the seeds of greater fiscal stress are already sown — economic weakness is spreading rapidly and tax revenue from the continuing base should be very weak in the April-June quarter, although perhaps partially masked by payments with 2007 tax returns.

“After June, tax revenue is likely to be extremely weak as most states begin their fiscal years — and such weakness may linger as the year progresses. Many states finalized their 2008-09 budgets during the April-June quarter, when conditions may have misled forecasters into revenue projections that were too rosy. Governors in some states may, then, face difficulty implementing their new budgets — raising the prospect of potential midyear cuts and other actions to eliminate emerging gaps.”

State tax collections are made up of three primary components: personal income taxes, sales taxes, and corporate income taxes. Personal income tax revenue increased 4.4 percent during the first quarter of 2008 when compared to the same period a year earlier, and they were up slightly when compared to the last quarter of 2007. Corporate income tax declined for the third consecutive quarter, by about 5.1 percent. And sales tax collections registered a slight decline of 0.04 percent, according to the Rockefeller Institute’s survey of state revenue agencies.

Overall, states collected $155.3 billion during the first quarter of 2008. About $64 billion, or 41 percent, came from personal income taxes. About $55 billion, or 35 percent, came from sales taxes, and about $10 billion came from corporate income taxes. States collected another $26.3 billion in taxes from other sources during the first quarter.

Regional Diferences

Total tax revenues, in general, declined in the Southeast and Rocky Mountain states while growth was in the single digits in all other regions. The New England states showed the strongest overall revenue growth of about 5.3 percent, while the Southeast states saw revenue decline by about 2.6 percent.

Total collections were up more than 10 percent in Alaska, Iowa, North Dakota, and West Virginia. Total tax revenues fell in 15 states. Declines of more than 10 percent were in Arizona, Montana, and Florida. Georgia, Idaho, Mississippi, Nebraska, Nevada, New Jersey, North Carolina, Ohio, Oklahoma, Rhode Island, South Carolina, and Utah showed smaller declines.

“We also saw inflation in state and local government costs stay above six percent during the first quarter,” Boyd added. “This continues a recent trend of significantly higher inflation increases than those in the broader economy.”

This is the Rockefeller Institute’s 72nd report on state tax revenues. The Institute’s Fiscal Studies program began tracking the data in 1990.

For a complete copy of the new report, visit: www.rockinst.org

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About the Rockefeller Institute of Government

The Nelson A. Rockefeller Institute of Government, at the University at Albany, is the public policy research arm of the State University of New York. The Institute conducts fiscal and programmatic research on American state and local governments. Journalists can find useful information on the Newsroom page of the Web site, www.rockinst.org.

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