State Tax Revenues Skyrocket in Early 2005

Published September 1, 2005

State tax revenues are climbing much faster than initial estimates in most states, according to a U.S. Census Bureau survey.

Total state tax revenues increased almost three times faster than inflation in the first quarter of 2005. Based on figures updated July 17, the 50 states received $154.9 billion in tax revenues from January through March. This compares to $141.1 billion during the same months in 2004–an increase of nearly 10 percent.

Maryland Tax Receipts Balloon

On July 14, Maryland State Comptroller William Donald Schaefer (D) announced, “unanticipated Maryland general fund revenues have expanded $141 million from previous reports made just two months ago due to rapid expansion of the state’s economy.”

According to Schaefer, the state’s tax revenue surplus stands at nearly $400 million, far surpassing the $250 million surplus announced in May. Tax revenues show a “13 percent increase in total tax revenue over FY 2004 receipts.”

“This is good news for the state,” Schaefer said, “but it’s important to remember that this is not ‘extra’ money.” Schaefer added, “Marylanders are working hard, the economy is responding and revenues are soaring.”

‘These Are the Good Times’

Maryland’s experience is not unique.

On July 16, the Lincoln, Nebraska Journal Star reported, “A special legislative committee that is the ‘warning bell for bad times’ met this week and took no action. There is no need for a warning. State tax revenues have been above the official projections every month but February during the fiscal year that ended June 30. These are the good times.”

In May 2005, Arizona took in $663.5 million in tax revenues, a 30 percent increase over May 2004 and $99.5 million more than was forecast for the month, according to a July 6 report from the state’s Joint Legislative Budget Committee.

Job Growth Drives Gains

A June 2-3 economic symposium held in Detroit by the Chicago Federal Reserve Bank revealed job growth for the past 18 months has been strong.

“Employment gains were solid in 2004, with the addition of over 2.1 million jobs, which averaged to 183,000 jobs per month,” said William A. Strauss, a senior economist at the Chicago Fed. “This was above the trend growth rate of between 140,000 and 150,000 jobs per month. Job growth for the first five months of 2005 has been slightly lower, averaging just under 180,000 jobs per month. These 2005 figures are still above trend.”

Concerning the future of the economy, Strauss noted, “The forecasts for 2005 and 2006 are for growth to moderate in almost every economic sector but still expand at a rate regarded as close to trend. Real GDP is anticipated to rise by 3.2 percent this year and by 3.3 percent in 2006.”

State Tax Collections

Sales, Income Taxes Lead Rise

The Census data indicate sales and income taxes are leading the climbs in state revenue. In the first three months of 2005, state governments obtained 33.9 percent of their revenues from state sales taxes and 32.1 percent from state individual income taxes.

Since the first three months of 2004, state sales tax revenues have increased 6.5 percent, while state individual income tax revenues have increased a whopping 11.7 percent. Together, these two taxes accounted for more than $100 billion in all state revenues in January-March 2005.

Lower Tax Rates Are Key

The American Legislative Exchange Council (ALEC), a bipartisan Washington, DC-based organization of state legislators, sees lower taxes as key elements in fostering higher state economic growth.

Iowa State Rep. Jamie Van Fossen (R-Davenport), public-sector chairman of ALEC’s Tax and Fiscal Policy Task Force, said, “A recent survey of members indicated that tax policy was still their top concern. In the most recent legislative session, over 500 bills to lower the tax burden and curb excessive government spending were introduced by ALEC members.”

Van Fossen added, “Current tax revenue forecasting methods score a tax cut as a ‘loss’ to the government, while tax increases are scored as a ‘gain.’ This assumption is in conflict not only with the Jeffersonian theory of limited government but also empirical evidence showing that behaviors change in response to tax changes.

“Under general equilibrium theory, tax increases may bring in less revenue due to a reduction in economic activity, while tax cuts may bring in more revenue due to increases in economic activity,” Van Fossen said. “As legislators consider tax changes, it is important that information on these behavioral changes is available.”

Top State Revenue Producers

The Census data indicate eight states–California ($22.5 billion), New York ($14.4 billion), Florida ($9.3 billion), Texas ($7.9 billion), Pennsylvania (($7.6 billion), Illinois ($7.4 billion), New Jersey ($5.3 billion), and Ohio ($5.3 billion)–generated more than $5 billion each in state tax revenues during the first three months of 2005.

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