Revenue streams remain question mark as most states head into FY 2010

For state governments, “FY 2009 can be summed up in one word: dismal.” This, according to a new report by the National Conference of State Legislatures (NCSL). And how do they foresee FY 2010? “FY 2010 can be characterized by two words: even worse.”

The NCSL has released its latest report, “State Budget Update: July 2009,” detailing the condition of states’ fiscal health in the year ahead. The report paints a gloom and doom picture ahead of this year’s Legislative Summit, being held in Philadelphia this week. According to NCSL estimates, cumulative budget shortfalls reached $113.2 billion in 2009, which pales in comparison to the projected amount facing lawmakers as they enacted new spending plans for FY 2010. In the last three months of FY 2009, the total budget gap for FY 2010 has expanded to $142.6 billion. This number, NCSL points out, does not include any new gaps that may open after the fiscal year began, which was on July 1 for forty-six states.

“If you think legislators are breathing a sigh of relief because their budgets are passed, think again,” William Pound, NCSL executive director, said in a statement. “If history repeats itself, states are bound to see budget gaps reappear within the first quarter of FY 2010.”

Among the wide-ranging issues discussed in the July State Budget report, NCSL analysts looked at how states solved their FY 2010 budget gaps and what role the American Recovery and Reinvestment Act played in those solutions.

One of the biggest drivers behind the bipartisan organization’s pessimistic outlook on the rest of FY 2010 and FY 2011, is the rapidly accelerating domino-effect of falling revenue streams for state and local government. Chief among those declines in revenue is personal income tax. As more people lost jobs, took pay cuts, endured furloughs, or worked fewer hours, personal income collections fell 17.5 percent during the first quarter of 2009. But personal income is only one in a trifecta of revenue problems, according to Corina Eckl, Fiscal Program Director for NCSL says.

“Concerns remain around the performance of major state tax sources–personal income, sales tax and corporate income,” Ms. Eckl said in an e-mail response.

In fact, according to a recent report by the Rockefeller Institute of Government, state tax collections dropped 11.7 percent in first three months of 2009, compared to the same period last year. The one bright spot for local government is property-tax revenue, which remains relatively steady year-over-year, Ms. Eckle said.

But even that constant stream of money may become increasingly difficult to tap as the recession enters into its second or third year.

According to Donald Boyd, senior research fellow at the Rockefeller Institute, property value declines do not usually translate directly into property tax revenue declines. Due to a wide range of intervening factors, including jurisdiction, current consumer advocate laws or weather a property is currently owned or being developed, it may take several years for property values to affect the bottom line. “Property tax revenue tends to be lagged and muted and far less sharp than the economic response of income, corporate and sales taxes,” he said in an e-mail. “But a word of caution: how this happens is highly idiosyncratic, depending on specific rules and practices in a given jurisdiction.”

Mr. Boyd used California and the city of New York as two different examples. In California, due to “rules of a past proposition, many jurisdictions appear to be reflecting market value changes in assessed values quite rapidly, increasing stress on local taxing jurisdictions.” New York City, on the other hand, assesses values at a much slower pace. “[I]t could take five or more years before the market value declines are fully reflected in the assessment roll used for tax purposes.”

As most states look towards the year ahead, many know they will encounter a drying of the tax base. How they respond to the ebb and flow of their revenue streams will decide if they can survive the even-worse-than-dismal FY 2010.

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