Rising income taxes lift state, local revenues

Reuters News
Posted: Sep 27, 2011 2:34 PM
Rising income taxes lift state, local revenues

WASHINGTON (Reuters) - Revenues for state and local governments grew for the seventh straight quarter this spring, buoyed by individual income taxes, Census data released on Tuesday showed.

State and local revenues rose 6.9 percent in the second quarter of the year from the same quarter in 2010, to $344.5 billion. Individual income taxes provided the strength, shooting up 17.4 percent to $90.6 billion from the second quarter of the previous year.

That was the largest year-on-year growth in personal income taxes since the second quarter of 2006, said Chris Mauro, head of municipal strategy at RBC Capital Markets.

"We caution that the increase ... was likely principally due to quarterly capital gains tax payments that were generated by the run-up in the equity market during the late spring and early summer of 2011," Mauro said in a research note, pointing out that a late summer drop in equity prices will likely curb future revenue gains.

Mauro said that "recent weak employment growth and anemic personal income growth will likely contribute to underwhelming personal income and retail sales collections at the state level over the near to intermediate term, thus setting the stage for another difficult state budget season in early 2012."

Only one state, Wisconsin, posted a decline in individual income tax revenues, of 6.6 percent. North Dakota, which has the lowest unemployment rate in the nation, had the biggest increase, of 80 percent.

"A combination of tax increases across the country and slow progress in the private sector have allowed state and local governments to generate higher revenues," said Gregory Daco, principal U.S. economist at IHS Global Insight, in a special analysis of the data.

He added that state and local revenues remain below their 2008 peak and "the road may get steeper as recent signs of weakening economic activity will weigh down on the tax base."

As the 2009 economic stimulus plan ends, state and local governments are worried about having enough revenues to make up for fewer federal dollars for roads, schools and healthcare.

Most cities rely on property taxes to fund services and infrastructure, and the Census data showed those revenues dropped for the fourth quarter in a row.

State and local property tax revenues decreased 1.2 percent in the second quarter from the year before to $88.5 billion. Of that, local governments brought in $85.9 billion, a drop of 1 percent from the year before.

According to the National League of Cities, those revenues will likely not improve soon because of a lag in property valuations and a depressed housing market.

The Census reported sales tax revenues rose 4.4 percent to $80.5 billion and corporate income tax shot up 20.5 percent to $18.7 billion.

Still, sales tax revenues dropped in five states and the District of Columbia. Again, Wisconsin posted a steep decline, 26.5 percent. The state, where disputes over taxes and spending led to a standoff on public employee compensation this year, also posted a 19.8 percent decline in corporate income taxes and a 46.7 percent drop in severance taxes.