Overall state tax collections have recovered from the Great Recession, according to a recent report from the Rockefeller Institute of Government at the University of Albany.
“States’ tax collections grew for the ninth straight quarter in the first three months of 2012,” said the report’s author, Senior Policy Analyst Lucy Dadayan. “Overall state tax revenues are now above pre-recession levels, as well as above peak levels that came several months into the Great Recession. Yet fiscal challenges remain. Twelve states reported tax revenue declines in the first quarter, and local taxes fell.”
Although the toughest times appear to be over, several fiscal challenges at the state and local levels remain, she said.
In the first quarter of 2012, total state tax revenues were 4.8 percent higher than during the same quarter of 2008. After adjusting for inflation, however, revenues are 1.6 percent lower compared to the same quarter four years ago.
Biggest Gains in Great Lakes
All regions but the Far West reported growth in total collections. The Great Lakes region showed the largest gain at 13.2 percent, followed by the Southwest states at 7.9 percent. The Far West region showed a decline of 0.9 percent. The Great Lakes region’s gain, however, was skewed by huge tax increases in Illinois.
Revenue gains were particularly strong in North Dakota, up 52.6 percent, mostly due to the booming oil and natural gas industries. The strong growth in the Great Lakes is largely attributable to Illinois, where personal income tax collections grew by 41.1 percent, mostly driven by a 67 percent increase in the personal income tax rate in 2011. Illinois also raised the corporate income tax rate 46 percent.
The Far West reported overall declines in California, Hawaii, and Oregon.
Faster Recovery Than Overall Economy
According to the report, the growth in state tax revenues has been ‘neither fast nor uniform’ across states. However, state fiscal conditions in general have recovered faster than the overall economy, as measured by gross domestic product (GDP), employment, or consumer spending.
“Throughout 2011, state tax revenue has risen significantly while the overall economy has been growing at a relatively slow pace,” Dadayan said. “Also, in much of 2009 and 2010, state revenue declines were much larger than the quarterly reductions in real GDP. Thus, although the growth rate in state tax revenues is not far from the growth rate in the overall economy in 2012, state tax revenues have been more volatile than the general economy in prior years.”
One reason for this recent surge is the relatively strong sales pattern of durable goods.
“Durable goods consumption, an important element of state sales tax bases, showed an increase of 6.9 percent in the first quarter of 2012 relative to the same quarter a year ago” said Dadayan. “However, the growth in durable goods has softened compared to the 10 percent growth reported in the same quarter of 2011.”
While state tax revenues have been recovering, many localities face significant fiscal challenges. The report notes most local governments rely heavily on property taxes, which tend to be relatively stable and respond to property value declines more slowly than state income, sales, and corporate taxes respond to declines in the overall economy.
“The Great Recession led to a growing divergence between state and local government tax performance,” Dadayan said. “State tax revenues collapsed steeply from 2008 to 2010 while local tax revenues continued to grow. Such trends have reversed since 2010, and state tax revenues started trending upward while local tax revenues have been mostly heading downward. Fiscal pressures are continuously mounting for local governments, and depressed housing prices are now causing declines in local property taxes.”
Local property tax revenues showed a decline of 0.9 percent in the first quarter of 2012 compared to the same quarter of 2011.
John W. Skorburg ([email protected]) is associate editor of Budget & Tax News and a lecturer in economics at the University of Illinois at Chicago.
“States’ Total Tax Collections Remain on Rise,” Nelson A Rockefeller Institute of Government: http://www.rockinst.org/pdf/government_finance/state_revenue_report/2012-08-02-SRR_88.pdf