Overall state tax revenues in the fourth quarter of 2010 showed growth for the fourth consecutive quarter, according to a recent report by the Nelson A. Rockefeller Institute of Government in Albany, N.Y. State tax revenues grew by 7.8 percent and 42 states reported total tax revenue growth, while nine states showed double-digit growth. “The sky has stopped falling,” said Donald Boyd, a senior fellow at the Rockefeller Institute and a co-writer of the report.
Both personal income tax and sales tax revenue increased by 10.6 and 5.6 percent, respectively. However, Boyd added, while revenue is beginning to recover, it is still well below where it was before the recession, and cash-strapped states devastated by the recession will be raising taxes this year. State tax revenues were still slightly lower in the fourth quarter of 2010 than in the same quarter three years earlier, the report said, while only 18 states reported higher collections in the fourth quarter of 2010 than in the same quarter of 2007.
“Tax revenue is far more volatile than the economy,” Boyd told MillionaireCorner.com.”Think of it as falling off a cliff. State tax revenue fell astoundingly far in the wake of the recession particularly in the 2009 fiscal year. What has happened in the last four quarters is we’ve finally got some growth, but (revenues) are still way below what they were.”
The Wall Street Journalidentified at least 10 states that have instituted or are considering some kind of increase in sales or income taxes: Arizona, Connecticut, Delaware, Illinois, Massachusetts, Minnesota, New Jersey, Oregon, Washington and Wisconsin.
States and local government are facing their most challenging budget year. The good news on the revenue front is offset by pressures on spending, Boyd said. “The biggest spending item in state budgets is Medicaid. Education is another big item. There are not fewer kids in school. So pressures are rising while there is far less revenue than there had been a couple of years ago.”
Fiscal pressures, Boyd added, are shifting to local governments, which must grapple with a combination of weaker property tax revenue, cuts in state aid, the loss of federal stimulus money, rising pensions, and other related pressures. “The political pressures against tax pressures are great,” he said. “What we’re seeing is more spending cuts and substantial (job) cutbacks across the board.”
Preliminary data for the first two months of 2011 suggest that tax revenue growth is continuing. While this growth in states such as Illinois is driven by tax increases, the report states that “the underlying economy is the basis for revenue growth. With early data for January and February now available for 45 states, tax revenue increased by 9.5 percent compared to the same months of the previous year. “Preliminary data for March suggests that growth for the full quarter is likely to be somewhat less, but still strong.”