State Tax Collections Continue Slide

by Leroy Baker, Tax-News.com, New York

19 May 2009

The weakened national economy continued to erode state tax collections during the first quarter of 2009, with overall tax collections falling 12.6%, according to a new report from the Rockefeller Institute of Government.

The preliminary report, which included data from 47 of the 50 states, noted that the 15.8% decline in the personal income tax component — one of the three major sources of states’ tax revenues — was the largest such decline since 2002. The revenue data in the report compared the first quarter of this year to the same period last year.

“We expect revenue collections, particularly collections from the personal income tax, to deteriorate even further in the April-June quarter based in large part on declines in financial markets and income tax returns due in April,” said study co-author and Institute Senior Policy Analyst Lucy Dadayan.

In addition to the personal income tax drop, the report noted that sales tax collections in the states continued to drop — falling off 7.6% — and corporate income tax collections fell 16.2%. This is the second quarter in a row that revenue from all three major sources of tax revenue for the states declined.

After adjusting for inflation, overall tax revenues declined by 14% during the first quarter, compared to the same quarter in 2008.

The Far West region suffered the worst falloff in tax collections, with revenue down by 18.1% overall. The Plains states saw the smallest reduction, with a decrease of 5.0%. The results from other regions were: New England down 12.9%; Mid-Atlantic down 14%; Great Lakes down 10.3%; Southeast down 11.7%; Southwest down 9.9%; Rocky Mountain down 11.5%.

“The revenue situation worsened in nearly every state in the first quarter of 2009, including states that rely heavily on energy resources — most of these states had been spared the worst of the fiscal crisis until recently,” Dadayan said. “Deeper revenue shortfalls and more budget adjustments are likely on the way for at least the next two quarters of this year.”

Dadayan noted that state tax revenues generally fall sharply after a recession for two or more years before any recovery.

“While some experts say the beginnings of an economic recovery may be underway, deterioration in the fiscal picture for states will likely continue in the near term,” Dadayan added.

The preliminary report issued on May 13 did not include data on Montana, Nevada, and New Mexico.

In a bid to arrest the decline in personal tax revenues several states, including California, Maryland, New Jersey, New York and, earlier this month, Hawaii, have adopted so-called ‘millionaires taxes’ on high income earners.

On May 11, the Hawaii Legislature forced through several tax increases, including the addition of three income tax brackets on top of the current nine, despite a veto from Republican Governor Linda Lingle. Under the changes, income over USD150,000 (USD300,000 for joint filers) will be taxed at 9%; income over USD175,000 (USD350,000 for joint filers) will be taxed at 10%; and income over USD200,000 (USD400,000 for joint filers) will be taxed at 11%.

By adding the 11% bracket, Hawaii will move from eighth to first in the ranking of top state income tax rates, passing Maine, New Jersey, Iowa, Oregon, Vermont, Rhode Island and California, according to the Tax Foundation, the non-partisan tax policy think tank.

"States that adopt new taxes on high-income earners are ones where policymakers are persuaded to ignore concerns about long-term economic growth in favor of a short-term budget fix that avoids deep spending cuts," said Tax Foundation director of state projects Joseph Henchman and analyst Mark Robyn in a new report.

"In New Jersey, while the new millionaires' tax raised revenue for the state and helped reduce a budget shortfall, it reduced the state's overall economic output and harmed its ability to grow during and after the recession."

Also included within the Hawaii legislation are tax increases for hotel accommodations, property and cigarettes.

Meanwhile, in Illinois, Democratic Governor Pat Quinn is sticking by his proposal to permanently increase income tax to 4.5% from its current 3% to fix the state’s budget. But with 45 states facing combined budget deficits of USD132bn through fiscal year 2010, it is not surprising that several other capitols are considering income tax increases, including Connecticut, Delaware, Minnesota and Oregon.

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