Economic Recovery Still Eluding State Coffers

Published May 24, 2010

As the national economy slowly recovers, income-related state revenues continue to shrink.

A report from the Nelson A. Rockefeller Institute of Government suggests lagging employment numbers from the “great recession” are still haunting some state revenue sources.

“A drop in personal income tax revenues collected by the federal government through the end of April 2010 suggests that states may suffer significant declines in such tax collections compared to 2009,” the report notes. In short, after experiencing revenue declines in 2009, the recession is still not over for most state and local governments.

Rockefeller Institute fiscal experts predicted states would face such a decline in their last State Revenue Report, released April 16. The report shows states have already suffered revenue drops for a record five quarters. The declines are expected to continue, at least in the near term, as the national unemployment rate remains stubbornly high, at 9.9 percent in April, according to the Bureau of Labor Statistics.

“We have been watching this data closely since our last report, when we discussed this issue,” said Rockefeller Institute Senior Fellow Donald J. Boyd. “With the data now in hand, it’s all over but the crying.”

Shortfalls Continue
“There weren’t any major changes in federal tax law that would have caused this [continued] revenue drop,” Boyd said. “And it is a pretty good indication that states, too, will have large year-over-year declines in April tax payments. . . . Federal income tax collections through April make it clear that good news from income tax returns is not on the horizon for states that have already suffered revenue declines.”

According to a recent Census data study by the Tax Foundation, 45 states experienced declining tax collections in 2009, with 16 suffering double-digit percent declines.
“Corporate and individual income taxes have the greatest amount of volatility, while sales taxes tend to be more stable,” said Tax Foundation economist Kail Padgitt, confirming the Rockefeller Institute’s thesis. “Overall, state tax revenues fell by 8.9 percent in 2009.”

California Collapse
California State Controller John Chiang (D) documented a huge drop in state tax revenues in his recently released report on California’s cash balance, receipts and disbursements.

“The month’s receipts dropped below the Governor’s 2010-11 budget estimates by $3.6 billion, or 26.4 percent,” wrote Chiang.

“Four months of positive receipts were erased in the last 10 days of April,” he added. “Because a surge in revenues has not come, the Governor and Legislature need to move quickly and forge the consensus needed for a balanced budget. Any delay will only limit their options and expose already struggling Californians to greater harm.”

Illinois’ Historic Backlog
Illinois is likewise nearing insolvency.

“Last week was a dark week for Illinois government and, by extension, the Illinois taxpayers,” said Dennis LaComb of the United Republican Fund as the state legislature adjourned in May without passing a new state budget for the fiscal year beginning July 1.
“The level of unpaid obligations in my office stands at $4.4 billion and will continue to grow,” noted State Comptroller Daniel W. Hynes (D) in an open letter to Illinois citizens and lawmakers. He added, “The state has borrowed $2.25 billion that must be paid back within the next six months.”

At the end of March, the volume of unpaid bills from the General Funds in the Comptroller’s Office stood at $4.496 billion, whereas at this time last year payables totaled $3.401 billion.

“I am disappointed as well as deeply concerned that you [Illinois companies] have been placed in this situation,” wrote Hynes. “You deserve better, and the people that you work with and care for deserve better as well. Instead of the non-stop cycle of extended payment delays, we need a comprehensive plan that will eliminate the deficit and restore fiscal stability to Illinois for the long term.”

John W. Skorburg ([email protected]) is associate editor of Budget & Tax News and a lecturer in economics and finance at the University of Illinois at Chicago.

Internet Info

The Nelson A. Rockefeller Institute of Government’s state revenue reports:

California Controller Office’s General Fund Cash Receipts reports: