States’ tax revenues finished strong in 2010, continuing a trend toward gradual fiscal recovery, according to the Rockefeller Institute of Government’s latest State Revenue Report.
State tax revenues grew by 7.8 percent in the fourth quarter of 2010, compared to the fourth quarter of 2009, according to Rockefeller Institute research and Census Bureau data. This is the fourth consecutive quarter that states reported growth in collections on a year-over-year basis. Forty-two states reported tax revenue growth during the fourth quarter, with nine showing double-digit growth.
Preliminary figures for January and February 2011 indicate further strength in state tax revenues this year. Overall collections in 45 early-reporting states showed growth of 9.5 percent compared to the same months of 2010, and 7.5 percent compared to the same months of 2009.
Local Tax Revenues Lag
Local tax revenues, however, have experienced the reverse. Tax collections by local governments declined by 2.3 percent in the fourth quarter of 2010, mostly driven by declines in property tax collections. This is the result in part of the lagged impact of falling housing prices on property tax collections. Such a lag in the recession’s impact on local government coffers is somewhat typical, say report authors Lucy Dadayan and Donald J. Boyd.
“Most local governments rely heavily on property taxes, which tend to be relatively stable and respond to property value declines more slowly than income, sales, and corporate taxes respond,” Dadayan and Boyd write.
Property tax collections made up 85 percent of local tax revenues in the fourth quarter of 2010, the report notes.
Need for Caution
Dadayan and Boyd stress that the road to fiscal recovery will remain slow and gradual. States collected $715 billion in total tax revenues in calendar year 2010, a gain of 4.3 percent from $685 billion in 2009. However, that 2010 figure was still about $60 billion or 7.8 percent below the levels reported in 2008.
While tax collections in 2010 were promising in most states, 10 states reported declines. Most of the revenue growth in the early part of 2010 was attributable to tax increases imposed during and after the Great Recession, which were disproportionately concentrated in California, Massachusetts, New Jersey, North Carolina and New York. In more-recent quarters, economic growth appears to have played a more-important role in tax revenue growth.
Focus on Spending Control
Employment and other economic factors that drive state tax revenues remain somewhat weak. Most states are emphasizing spending restraint rather than tax increases for their upcoming budget years, and there appears little chance that significant new federal assistance will be considered in the coming year. Meanwhile, most states will see significant increases in pension costs and some other expenses.
Dadayan and Boyd conclude, “The bottom line: State budgets will likely face continuing pressure at least until the national economy enters a new period of continuing, robust growth.”
The Nelson A. Rockefeller Institute of Government
State Revenue Report, Nelson A. Rockefeller Institute of Government: http://www.rockinst.org/pdf/government_finance/state_revenue_report/2011-04-19-SRR_83%20rev.pdf