News Release - Data Alert: States’ Economies At Bottom

NEWS

For Immediate Release –

July 14, 2010

Media contact: Heather Trela – (518) 443-5831 / communications@rockinst.org

Data Alert: States’ Economies At Bottom, Looking a Long Way Up

New retail sales data are the latest sign of ongoing fiscal trouble for states, say Rockefeller Institute experts

Albany, N.Y. — Today's retail sales data for June from the Commerce Department continue a string of recent news that portends ongoing weakness in state tax collections, according to the Rockefeller Institute of Government’s fiscal policy experts.

As an Institute report released yesterday noted, state tax collections improved on a year-over-year basis in the first quarter of 2010, marking the first such gain since the third quarter of 2008. However, the report pointed out that there were continuing signs of weakness for states’ economies. Today’s retail sales data underscore that forecast.

There is good news in today’s Commerce Department report, according to Institute Senior Fellow Donald J. Boyd. As Boyd notes in a new Data Alert, retail sales and food services were up 4.8 percent from their level a year ago, albeit by less than in the prior two months. This continues the year-over-year growth we have seen since November 2009, as shown in Figure 1. State governments rely on general sales taxes for just under a third of their tax revenue, and retail sales are an important driver of these taxes. This means that states’ sales taxes are likely to show some year-over-year growth now and in coming months.

But the bad news is that the just-emerging economic recovery has weakened. When compared with the previous month rather than a year ago, retail sales are down now for a second month in a row after having risen sharply for about a year. Furthermore, and particularly depressing for state governments, retail sales remain more than 7 percent below their pre-recession peak after adjusting for inflation. As noted in an earlier Institute report, real sales tax revenue has been even weaker than retail sales, and is down more than 10 percent from the pre-recession peak.

Recent data on employment – which drives both personal income and sales taxes – provides no solace for state governments. Total nonfarm employment declined slightly in June relative to May, and private sector employment was virtually flat. Total employment remains more than 5 percent below the pre-recession peak and the consensus outlook is for weak growth as the year progresses.

While the economy and state tax revenue have stopped dropping, Boyd writes that they are both below pre-recession levels. What’s more, states have not ratcheted down their spending as much as their revenues have declined. Spending revenues, he writes, “have been supported in part by the federal stimulus package, withdrawals from reserve funds, gimmicks and one-shots, and some permanent and temporary tax increases.”

The federal stimulus, as well as other of these resources, will vanish at the end of the 2010-11 fiscal year.

“Tax revenue has stopped falling off a cliff but it's at the bottom looking a long way up; meanwhile, states face a new cliff,” Boyd writes. “Fiscal troubles for states are far from over.”

To see the full Data Alert, including supporting graphics, visit the Institute's Web Site.

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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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