More State Budget Strains to Come?

Published July 1, 2009

State sales tax revenues have experienced their worst decline in 50 years, and overall state tax revenues are likely to continue to fall in the coming months, according to a report by the Nelson A. Rockefeller Institute of Government.

“Most state tax revenue sources are heavily influenced by the economy—the income tax rises when income rises, the sales tax increases when consumers increase their purchases of taxable items, and so on,” note the coauthors of the April 2009 study, Donald J. Boyd and Lucy Dadayan. “When the economy booms, tax revenue tends to rise rapidly and when it declines, tax revenue tends to decline.”

According to the report, “State tax collections for the fourth quarter of 2008 showed a decline of 4 percent, the first decline in more than six years. After adjusting for inflation, legislative changes, and known anomalies, tax revenue declined in 42 states.”

2009 Troubles

More budget pain is on the way, say Boyd and Dadayan: “For the opening [two] months of 2009, early figures show an overall decline of more than 12 percent, a further dramatic worsening of fiscal conditions nationwide.”

A Wall Street Journal analyst likewise sees more trouble ahead for state and local governments.

“While income and property taxes have generally fared better than sales taxes, those revenues are also under stress,” said Conor Dougherty, financial writer for, in a column commenting on the Rockefeller study.

Dougherty added, “Property taxes typically lag behind real-estate prices, because it takes municipalities a year or longer to reassess the home values on which those levies are calculated. With home prices still falling, property taxes are also set to grow more slowly or in some cases decrease.”

Spending Cuts vs. Tax Hikes

According to the Rockefeller study, “Weakness in tax revenue has forced states to take some steps to reduce planned expenditures in 2008-09 budgets and to consider more significant reductions in projected growth for fiscal 2010.”

Tax hikes also may be on the horizon, notes the study. “Because the full extent of revenue declines may not be known immediately, there is great risk that state budget deals negotiated over the next month or two will have to be buttressed with additional spending cuts or tax increases as the year progresses.”

Many economists do not recommend raising taxes during a recession. Several states are looking to cut their sales tax rate but broaden the taxable base into currently non-taxed services such as lawyer fees and haircuts.

Top Performers, Low Taxes

The American Legislative Exchange Council, whose membership includes about one-third of the nation’s state lawmakers, recommends spending restraint and low taxes. The group’s Tax and Fiscal Policy Task Force includes public-sector chairman state Sen. Jim Buck of Indiana (R-Kokomo) and private-sector chairman Bob Williams of the Olympia, Washington-based Evergreen Freedom Foundation.

“The top performing states keep taxes, spending, and regulatory burdens low, while the biggest losers tend to share similar policies of high tax rates, unsustainable spending, and regulation,” said Williams.

“Too many states were too eager to add programs and increase spending during the good times, but we now face very difficult choices,” said Buck. “While we need to make tough choices to live within our means, we also need to remain focused on policies that foster economic development and job growth as the best solution to our budget woes.”

John W. Skorburg ([email protected]) is a policy advisor to The Heartland Institute and associate editor of Budget & Tax News.

For more information …

“Sales Tax Collections Across U.S. Experience Worst Decline in 50 Years,” Rockefeller Institute: