State and Local Government Revenues Soaring in 2005

November 18, 2005

A new BEA release shows state and local government revenues skyrocketing thus far in 2005. As USA Today reports:

Soaring state tax collections have created momentum for tax cuts in 2006, when most governors and legislators will face voters.

State and local revenue rose 7.2% in the first nine months of this year, the biggest jump since 1990, according to the U.S. Bureau of Economic Analysis. Spending is up 6%, the most since 2001.

Three years of strong revenue growth have left many states with large surpluses. New Mexico is looking at a $1 billion surplus. Florida expects more than $3 billion.

Even financially troubled California took in $3.4 billion more than it spent in the budget year that ended June 30 – the state’s first surplus since 2000. California’s deficit was erased by a 13.2% revenue increase. (Full Story)

Tax revenues at all levels are pro-cyclical—meaning they rise and fall with the state of the economy—since the bases of both income and sales taxes rise and fall with the economy. Since the U.S. economy has boomed over the past year, governments are seeing their coffers grow dramatically.

As numerous studies have shown, it’s common for politicians to cut taxes during election years regardless of whether revenues are rising or falling. But since the state of the economy can be volatile, budget policymakers should pay careful attention to the risks associated with setting budget policy based on uncertain projections of future growth.

While tax reduction is economically almost always good news, it’s also important for lawmakers to stay focused on long-term sound tax policy that’s not constantly changing based on economic forecast from quarter to quarter, or the latest advice from political advisors.

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