State Tax Revenues Decline for a Record Fifth Consecutive Quarter, Rockefeller Institute Reports

Fiscal recovery likely to take several years, suggesting lingering budget difficulties

Albany, N.Y. — State tax revenues continued to deteriorate in the fourth quarter of 2009, marking a record fifth consecutive quarter of declining collections, according to a report issued today by the Rockefeller Institute of Government.

“State fiscal recovery is likely to be long and slow, presenting policymakers with several years of lingering difficulty in balancing budgets,” said Donald J. Boyd, senior fellow at the Institute and co-author of the report.

Overall, state tax revenues for the fourth quarter of 2009 dropped 4.2 percent from a year earlier and 8.6 percent from the same period two years earlier, according to Rockefeller Institute research and Census Bureau data. Forty-one states reported total tax revenue declines during the quarter, with seven states reporting double-digit declines. Nine states, led by New Hampshire and North Carolina, showed improvement in revenues relative to a year earlier.

The data continue to show regional differences in tax collections. Western states (especially those in the Southwest) and some Midwestern states (Michigan, Missouri and Ohio in particular) have been hit harder by the downturn than most others.

Unlike the last recession, the downturn in states’ tax revenues has resulted from sharp declines in both income tax and sales tax collections. The last recession caused a similarly steep dip in income tax, but did not hit sales tax collections as dramatically. In the most recent quarter, all major sources of state tax revenue fell from year-ago levels. The income tax was down by 4.6 percent, the sales tax was down by 5.3 percent and the corporate income tax declined by 3.6 percent.

While the decline in states’ tax collections is not as severe as in previous quarters, neither is it at an end, according to Institute researchers. Preliminary figures for January and February for 45 early-reporting states show continued weakness, with personal income tax collections dropping 7.1 percent and overall tax collections down 2.2 percent from a year earlier.

“There is a strong risk that income-tax collections in April and May will fall relative to the already weak levels of a year earlier,” Boyd said.

In contrast to state tax collections, local tax revenue increased during the quarter, by 4.6 percent. It was mostly driven by strength in property taxes, which may not continue through the coming year, according to Boyd.

“Property taxes in some areas are still being calculated on peak housing prices,” Boyd said. “Collections in some locales could be hit hard when local governments conduct revaluations.”

Over the past two decades, state tax revenues averaged annual, year-over-year increases in the range of 5 to 5.5 percent. In normal times, the last two years might have been expected to produce an overall revenue increase of 10 percent or more. Combined with the actual decline mentioned above, states have seen revenue drop by more than 18 percent relative to what might otherwise have been expected.

Another way to assess the current revenue picture is to adjust collections statistics for inflation and to remove seasonal variations, according to the report. Using this measure, tax revenues are currently at roughly the same level as they were in both 2000 and 2004. In other words, state tax revenue, adjusted for inflation, is at about the same level as 10 years ago, although the nation’s population has increased by approximately 10 percent during that period. Health care costs, a major driver of state expenditures, have grown far faster than general price inflation.

For a full copy of the report, visit www.rockinst.org.