Special Report No. 128
For most states, FY 2002 stretched from July 2001 through June 2002, a period that saw a significant economic slowdown, and the substantial economic repercussions of the September 11th attacks. The economic slowdown and recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. in Fiscal Year 2002 has had a profound effect on state taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. collections, with the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. , and corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. collections suffering the most significant losses.
State tax increases for FY 2003 were estimated at $8.3 billion. However, revenue collections fell far short of their initial estimates in fiscal year 2003. States saw widening gaps between planned expenditure and the revenue required to fund this spending. As for FY 2004, states have enacted a $9.6 billion increase in taxes, which include $2.6 billion in sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. increases, $2.4 billion in personal income tax increases, and a $1.8 billion increase in fees.1
It is in this context that we look back at state tax revenue in FY 2002, for which Census Bureau data are now final. During FY 2002, States that depend predominantly on the income tax experienced considerable cuts in revenue, as individual income tax revenue fell by a enormous 11.1 percent, the largest drop in over a decade. This struggling economy also lead to lower consumer spending, which hurt the coffers of states dependent on the sales tax.
1 “The Fiscal Survey of States,” The National Governors Association and the National Association of State Budget Officers, ISBN 1-55877-351-7, December 2003.Share