State Tax Revenue Begins Growing Again

October 20, 2010

The Nelson A. Rockefeller Institute of Government has a new report examining the latest state revenue data. The new Census Bureau data is for the second quarter of this year and shows that overall state tax revenue is growing again:

Total state tax collections as well as collections from two major sources – taxes on sales and personal income – showed growth for the second consecutive quarter, following five straight quarters of decline. Overall state tax revenues in the April-June quarter of 2010, after reflecting certain adjustments made by the Rockefeller Institute, increased by 2.3 percent from the same quarter of the previous year.

The 2.3 percent year-over-year growth for the second quarter comes out to 1.4 percent after accounting for inflation. Still, on whole fiscal year 2010 saw a 2.7 percent drop in total state revenue over fiscal 2009. So recent trends show some modest improvements that are hopefully indicative of a turning point in state revenue trends, but states are by no means out of the weeds yet.

Rockefeller also observes:

These [fiscal year] declines are even more pronounced compared to revenues of two years ago. Relative to fiscal 2008, personal-income tax collections were down 16.9 percent; sales tax, 7.2 percent; and total tax revenues, 10.8 percent. If recent historical norms had held constant, states would have seen revenue gains of some 10 percent over the past two years. Thus, the Great Recession brought a two-year revenue loss in the range of 20 percent, compared to what states had come to expect and have used in constructing the expenditure sides of their budgets.

This brings up an important point. This recession should be a warning to state lawmakers. They should never assume that recent historical trends will continue indefinitely, whether in good times or bad. The first part of the decade saw strong growth in state tax revenues, and lawmakers may have come to believe that this growth trajectory was the new norm, planning their future budgets based on unrealistic assumptions about revenue (see Joe Henchman’s related post outlining why state deficit numbers can sometimes be misleading). Hopefully this recession has taught lawmakers to be more cautious even in good times.

Ultimately, the report’s authors are pessimistic, noting that “recent revenue growth is mostly attributable to legislated increases and tax processing changes, and thus may not indicate the likelihood of further revenue gains without further tax increases.” I would be slightly less pessimistic: Revenue would recover eventually without tax increases (again, current trends are not likely to continue indefinitely), though revenue growth rates may not look like the mid 2000s anytime soon.

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