State Tax Revenues Rise to Pre-Recession Levels, but Local Governments See Decline

A steady increase in personal income and sales taxes has helped state tax revenue in most states to surpass previous peak levels seen at the start of the recession. All regions of the country saw gains in the fourth quarter of 2011, with the exception of the Far West. The Plains had the largest gain, at 12.5 percent, followed by the Great Lakes states at 8.9 percent. However, tax collections for local governments are not faring as well mostly due to the lagged impact of falling housing prices on property tax collections. Findings are from a recent Nelson A. Rockefeller Institute of Government report that looks at the impact of taxes on state revenue and highlights trends affecting state revenue changes.

The report finds that state tax collections have risen steadily with eight straight quarter increases. In the fourth quarter of 2011, total state tax revenue rose by 3.6 percent compared to a year ago and the income tax and sales tax revenues increased by 4.2 and 2.4 percent, respectively. Only seven states reported declines in total tax revenue during the fourth quarter of 2011 – Arizona, California, Louisiana, Massachusetts, New Hampshire, North Carolina, and Vermont. Twelve states reported double-digit increases during the same time period. Revenue gains were especially strong in Alaska and North Dakota, which the report attributes to booming oil and natural gas industries.

Gains in personal income taxes were greatest in the Great Lakes and Southwest regions, which is mostly due to a legislated tax increase in Illinois, the report finds. Thirty-eight states reported growth for the fourth quarter of 2011. Connecticut, a state that also enacted tax increases, reported a 22.9 percent gain in personal income tax revenue. When Illinois and Connecticut are excluded, personal income tax collections for the nation grew by only 1.3 percent.

Although sales tax collections were higher in fourth quarter 2011 than the same time last year, collections were still down by 3.2 percent from the same period of 2007. The Plains and New England regions reported the largest increases in sales tax collections at 10.6 and 8.4 percent. Thirty-eight of the 45 states with broad-based sales taxes reported growth in collections for the fourth quarter of 2011 and four states reported double-digit gains. Declines were reported in six states including Arizona, California and North Carolina.

Local tax collections, which rely heavily on property taxes, are steadily declining because of the lagged impact of falling housing prices, the report finds. Over the last four quarters, the real, year-over-year decline in local taxes was an average 1 percent. The report points to a growing divide between state and local revenue trends. While state revenues have been recovering for several quarters in real terms, local revenues have been declining in real value. If current trends continue, services funded by local governments, such as education and public safety, are likely to be under severe fiscal pressures, the report warns.

The state revenue report is available at: http://www.rockinst.org/pdf/government_finance/state_revenue_report/2012-04-19-SRR_87.pdf