Tax Revenues Still Lag Behind Pre-Recession Peak in 26 States

U.S. state tax revenues declined for the first time since the recent economic crisis, according to reports from the Rockefeller Institute of Government and the Pew Charitable Trusts. The small drop in revenues is not being viewed as a sign of another fiscal collapse, but does indicate that the recovery may be slowing. For the 26 states in which revenues still have not returned to 2008 levels, the slowdown may suggest that a full recovery could still be years away.

The Rockefeller Institute notes that state tax collections began to soften in the second half of 2013, leading revenues to decline in the first quarter of 2014 for the first time since the end of 2009. After four years of uninterrupted quarterly growth, states reported an overall revenue decline of 0.3 percent. Preliminary data suggests that revenues may drop again in the second quarter, due to declining collection of personal income tax.  The decline was anticipated by many because of a scheduled increase in federal capital gains tax rates, according to Pew and Rockefeller.

Both groups note that the current drop is not necessarily indicative of a long term-trend. In fact, Pew notes that overall U.S. state tax revenues have nearly returned to that pre-recession peak. Combined tax revenues from all 50 states have narrowly recovered to 2008 levels in inflation-adjusted dollars, according to Pew.

This recovery, however, has been very uneven across the country. Only 20 states have actually surpassed their inflation-adjusted levels from 2008. In 26 states, revenues continue to lag significantly behind peak levels. Alaska, Wyoming, Florida and New Mexico remain furthest behind their peak, with most states in the Mountain West and Southeast and Atlantic lagging behind the rest of the country.

North Dakota leads the nation in revenue growth, outperforming its 2008 tax collection by 115 percent in the first quarter of 2014. Pew attributed the growth to the success of the state’s oil industry in recent years. Illinois and Minnesota also rank in the top three states for recovery.

A Pew report on state spending notes that state spending fell in FY12 for the first time in 50 years due to the decline in federal aid following the end of the Recovery Act stimulus. Since the end of the stimulus program, states have struggled to increase revenues to replace the drop in federal funds. In Florida, where revenues remain more than 20 percent lower than in the pre-recession period, spending fell to its lowest level since 1990 in FY12.

Pew has put together an in-depth analysis of state fiscal health, including an interactive data tool and reports on state revenues, spending, federal support and overall economic situation. View Pew’s Fiscal 50: State Trends and Analysis…

Download Rockefeller’s state revenue report…