WASHINGTON (Reuters) - A budding recovery in state governments' revenues could be cut short if the economy weakens, according to a Rockefeller Institute of Government report released on Thursday.
Preliminary data for April and May shows states' revenues likely continued growing in the second quarter of 2011, following a spike of 9.3 percent in the first quarter, the report said.
Local tax revenues, though, likely dropped 0.6 percent in the first quarter as depressed house prices weighed on property tax collections, according to the report.
"Strong gains in state tax collections since late 2010 have been driven by both economic growth and legislated tax increases," wrote the author of Rockefeller's study, Senior Policy Analyst Lucy Dadayan. "If the economy continues to show weakness during the second half of 2011, revenue growth will likely soften as well."
That is because states' tax collections are still lower than they were in the first quarter of 2008, the last quarter before revenues collapsed from the 2007-2009 recession.
Almost all states -- 46 -- ended fiscal 2011 on June 30. Even though revenues are rising, the increase has not been steep enough to close budget gaps and states still had to eliminate more than $100 billion in total shortfalls as they prepared for the current fiscal year. All states except Vermont must by law end their fiscal years with balanced budgets.
During the worst of the recession, states had to raise taxes, cut spending in almost all areas of public life, turn to the federal government for help, and borrow.
With residents expressing no interest in tax hikes, and the federal government pledging not to repeat the extraordinary assistance given states in the $830 billion stimulus plan, states are primarily balancing their budgets with cuts.
"If revenues falter again in a weakened economy, states' budgetary choices will grow even more difficult," Dadayan wrote.
For the first quarter of 2011, 48 states reported tax revenue growth, with 21 states showing double-digit percentage increases, according to Rockefeller. Personal income tax and sales tax revenues increased for the fifth quarter in a row.
The Rockefeller report found that in the first two months of the second quarter, overall collections in 45 states grew 12.5 percent from the same period in 2010. But they were 8.9 percent below the collections in the same months of 2008.
Concern is growing nationwide that the recovery from the longest and deepest downturn since the Great Depression is developing new fault lines. The U.S. unemployment rate shot up to 9.2 percent in June, after hitting a two-year low of 8.8 percent in March.
The Center on Budget and Policy Priorities, which tracks states' budgets, recently said the revenues taken in during fiscal 2011 were higher than forecasts and than the collections for the year before. But, the group said, they were 9 percent lower than the amount they took in during fiscal 2008.
Meanwhile, a report by the economic newsletter The Liscio Report on Wednesday said that fewer states met their forecasts for sales tax collections in June than in May in a sign those revenues may be weakening.
(Reporting by Lisa Lambert; Editing by James Dalgleish)