State Sales, Income Tax Revenues Keep Falling

Published December 14, 2009

States suffered from falling tax revenues again in the third quarter, compared to the previous year, according to preliminary data in the latest state revenue “flash” report from the Rockefeller Institute.

All 44 early reporting states saw declines in collections, totaling 10.7 percent overall. It was the fourth consecutive drop for two major revenue sources—personal income taxes and sales taxes, which fell 11.4 percent and 8.2 percent, respectively. Further declines are expected in the fourth quarter of 2009.

Overall, the tax revenues collected by the 44 states fell from $134 billion during the third quarter of 2008 to $119.7 billion during the same period this year. Data were not available for Missouri, Nevada, New Mexico, Rhode Island, Texas, and Wyoming.

Alabama, Indiana Big Losers
Personal income tax revenue made up nearly 40 percent of total tax revenue reported in the third quarter. With 38 of 41 personal income tax states reporting so far, all 38 saw declines compared to the same quarter of last year, 21 of them reporting double-digit declines. Alabama and Indiana had the largest declines at 26.7 and 20.3 percent, respectively.

Among the corporate income tax states, 36 of 42 early reporting states reported declines for the third quarter compared to the same quarter of previous year, 32 of them seeing double digit declines.

“While stock indices have risen in recent months and some other indicators point to some strengthening in the economy, overall conditions remain weak,” the authors said in the report. “Most economists believe that a stronger move toward recovery is still at least some months away. Thus, further revenue shortfalls and more spending cuts are most likely on the way for many states—particularly those that did not take significant actions to balance revenues and expenditures in their fiscal year 2010 budgets.”

2010 Looking Worse
Dismal as 2009 was for tax revenues, 2010 looks even worse, according to Jonathan Williams, director of the Tax and Fiscal Policy Task Force for the American Legislative Exchange Council.

“The age-old question is, how did we get there?” Williams said. “The states have been relying more and more on progressive income taxes and capital gains revenues.”

When the economy tanked, unemployment rose and the stock market dropped, so income and capital gains dropped, and so did revenues from the taxes on them, Williams pointed out.

Warning Signs Ignored
Even though there were indications economic growth was slowing and a revenue decline was coming, states did nothing to cut back their spending, Williams said.

“If spending were under control, most states, with the possible exceptions of California and Michigan, wouldn’t be facing the budget shortfalls,” Williams said.

Phil Britt ([email protected]) writes from South Holland, Illinois.