Wednesday, May 25, 2011

WSJ: State Tax Revenue Increases by 9.1%, but Local Governments Struggling

A piece of good news for embattled states - tax revenues in Q1 2011 jumped 9.1%, the fastest rate in 5 years.  While revenue is still below pre-recession highs, and expenses continue to burgeon, this type of growth is necessary to help offset the massive inflow of dollars into the states from the federal government stimulus plans. It would have been helpful to see these figures broken out to see how much of the increase was due to tax hikes versus organic growth, but Goldman seems to believe that tax hikes were not the main driver.

For a state by state breakdown see here.


  • State tax collections grew at an accelerating pace in the first three months of the year, with a number of states seeing the upswing continue into the second quarter.  Tax revenue grew 9.1% in the first quarter for 47 states that have reported collections, the fifth straight quarter of growth and the fastest rate in five years, according to a report released Tuesday by the Nelson A. Rockefeller Institute of Government.
  • State tax revenue is still 3.1% below the pre-recession levels of three years ago. And many states are facing a growing imbalance between revenue and longer-term expenses, particularly the expanding cost of employees' pensions and health care
  • The revenue gains, which were driven by a 12.4% jump in personal income taxes, reflect the improving economy as well as tax increases passed during the recession
  • Sales taxes grew 5.6% while corporation income taxes, which are volatile and make up only a small portion of states' tax collections, grew 6.9% in the quarter.
  • Goldman Sachs, in a separate report Tuesday, said average state revenue in April was up 12% from a year ago for 11 big states—including California and New York—that the bank tracks. Much of that growth came from underlying strength in wages and retail sales rather than higher tax rates." "Although a few states enacted high profile tax increases for this year, the most recent revenue gains appear to be due mostly to underlying economic strength."
  • However, that doesn't mean states are out of the woods."Many states still face fiscal challenges and are struggling in balancing budgets, particularly in the absence of federal stimulus money that they relied on for the last three years," said Lucy Dadayan, a senior policy analyst at the Rockefeller Institute.

    That said, what is happening at the state level is not happening at the local level because of the reliance on property taxes:
    • And while state finances are recovering, the outlook for local government revenue is starting to deteriorate. That's because while states get most of their money from income and sales taxes, local governments rely more on property levies. Property taxes can take years to respond to falling home prices, and have only recently started to decline.

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