State revenues hobble toward pre recession peaks

Reuters News
Posted: Apr 13, 2012 12:34 PM
State revenues hobble toward pre recession peaks

By Lisa Lambert

(Reuters) - U.S. states' tax revenues have improved greatly, but they remain below the peaks reached before the recession, a report showed on Friday.

The U.S. Census said on Thursday that tax collections rose in all 50 states in fiscal 2011, which for most ended on June 30, 2011. That was a strong reversal from previous years, when the financial crisis, housing downturn and recession combined to cause a revenue collapse in virtually every state.

But the Rockefeller Institute of Government noted on Friday that overall tax collections were still 2.1 percent below peak levels, and personal income tax collections were still 6.8 percent below the high reached in fiscal 2008.

Although the recession began in late 2007, the effects on state revenue were delayed until the end of 2008. But those effects were dramatic, with revenues dropping from peak levels for five straight quarters to lows not seen in more than 20 years.

Because all states except Vermont must balance their budgets, they slashed spending, hiked taxes, borrowed and turned to the federal government for help. States often had to call emergency budget meetings to make additional adjustments, caught off guard by the rapid decline in revenue.

The Rockefeller report noted that in fiscal 2010, total tax collections were down from the peaks by a much steeper 10 percent and in fiscal 2009 by 8.4 percent.

States are currently finishing budgets for the next fiscal year and many are eager for revenues to return to those peaks, especially as demand for public services such as unemployment benefits and healthcare remains high.

The Rockefeller report said that in fiscal 2011, sales tax collections were an "insignificant 0.3 percent" above their peaks.

"Overall state tax revenues still have a long way to go before they fully recover from the deep declines caused by the Great Recession," the report said.

While the recession was fairly uniform, recent economic improvement has been uneven among states and the report said the "extent of revenue recovery varies dramatically."

More than half the states, 32, reported total tax collections were still below their peaks in fiscal 2011, and 17 reported tax collections that were higher. While 28 states said their sales tax collections remained below the pre-recession peaks, 18 said they had surpassed those levels.

Personal income tax performance has been more consistent, suffering "the most persistent and widespread declines, despite strong growth in the last year or so," Rockefeller said.

Of the 43 states that levy personal income taxes, 38 reported declines in fiscal 2011 from their peak levels.

"Several states are experiencing increased economic activity, while a few are still grappling with structural budget challenges," wrote Tom Kozlik, municipal credit analyst for Janney Capital Markets, in a note on Friday.

"A gradual, but widespread economic recovery is taking place nationwide," he added.

In a past report, the Rockefeller Institute said that in the fourth quarter of 2011, the revenue surge was tapering off, up just 2.7 percent from the final quarter of 2010 versus an 11.1 percent jump and a 6.1 percent gain in the second and third quarters, respectively.

(Editing by Dan Grebler)