Report Credits Improved Economy for Boosting State Tax Revenues

Growth in personal income tax has led to a revival of state tax revenues, the same source that led to the previous decline, according to a report released by the Nelson A. Rockefeller Institute of Government. The report indicates sustained growth in states' economies over the past three quarters, with increases in revenue from personal, sales and corporate taxes, creating optimism for the future of state budgets.

State tax revenue grew by 8.1 percent in the January-March quarter compared to the same period in 2003, a continuous growth since the last period of decline in July 2001 through June 2002, according to State Tax Revenue Recovery Gathering Steam. Legislated tax increases enacted in several of the states over the last three years have contributed to the revenue growth, the report indicates, although the January-March quarter growth was still strong after tax hikes were factored out.

Three underlying forces account for the trends in growth, the author notes, including differences in state economies, how these differences affect each state’s tax system, and recently legislated tax changes. Other highlights from the report include:

• Newly implemented changes in state tax laws generated a $1.1 billion net increase in state revenue, the ninth straight quarter with a net increase.
• Personal income tax revenue grew at a total of 8.7 percent. The strongest growth occurred in the Mid-Atlantic region at 16.1 percent; the weakest was in the Great Lakes region at 1.4 percent.
• General sales tax revenue grew 8.3 percent, the fifth straight quarter of strengthening and the strongest since the January-March quarter of 1995. The strongest growth occurred in the Far West region at 12 percent, with the weakest in the New England region at 3.4 percent. And,
• Corporate income tax revenue grew by 15.2 percent, the seventh straight quarter of growth after seven quarters of decline.

Pointing to growth in gross domestic product for the first quarter of 2004 and the steady improvement of the unemployment rate, the report states the national economy also is experiencing sustained growth with some areas of continued weakness. The report notes, however, that employment growth has been moderate and has not spread across all regions. For example, employment in the Southeast during the January-March 2004 quarter showed 1 percent growth, while the New England and Great Lakes states experienced overall declines in employment rates.

State Tax Revenue Recovery Gathering Steam is available from the Rockefeller Institute of Government at: http://ww.rockinst.org/