States twist tax knobs to realize first revenue increase since 2008

And they’re off!

State and local tax revenues are off to positive start for the first time since Q3 2008. The first quarter of 2010 saw state collections growing on a year-over-year basis, but according to the Rockefeller Institute of Government, there is little cause for celebration.

In the latest State Revenue Report from the Rockefeller Institute, the states’ revenue growth of 2.5 percent for Q1 was largely due to legislated tax increases in only two states: California and New York. State and local tax collections are still down 9.3 percent from prerecession levels, the report indicated, so disregarding those two states, tax revenues in the remaining 48 have declined by 1.5 percent.

Report co-authors Lucy Dadayan and Donald Boyd indicated that state collections remain fragile in the wake of record tax declines in 2009. In other words, this may be a short bounce off the cavern floor after slamming into it last year.

“Even if the economic recovery is as rapid as those from prior recessions, it would likely take state tax revenue several years to recover to its previous peak,” Dadayan and Boyd wrote in the report. The authors also said that little has changed to sway the assumption that slow economic recovery awaits most state treasuries.

The Rocky Mountain region saw the biggest declines in year-over-year revenues, due to a coming-down-to-Earth of oil prices. Wyoming, who was a revenue-making machine last year saw a decline of 30.2 percent, meanwhile Louisiana (another oil hotspot) reported a 24.6 percent drop. Areas in the far West and New England regions buoyed the country with tax revenue increases in California and New York of $3.5 and $2.3 billion, respectively. These increases are credited to legislative changes in these two states’ tax rates on personal income and sales taxes. Enacted tax changes nationwide increased state revenue by an estimated net of $4.9 billion compared to the same time in 2009, the report said.

While local tax collectors fared better than state coffers, ominous downward movements were seen in property taxes – a key revenue stream for local governments. According to the Rockefeller report, this has caused local governments to report declines in property taxes for the first time since the start of the recession. Adding to the 1.1 percent decline in local taxes is a poor showing in corporate income taxes.

“While we are beginning to see some positive figures in various economic indicators, the national economic picture remains mixed,” Boyd and Dadayan said in the study. “Analyses of some of the numbers in terms of longer-term perspective indicate that states will face a long and bumpy road to fiscal recovery.”

One of those numbers is retail sales data, which according to a another report released yesterday indicates more struggles for state tax collections.

“When compared with the previous month rather than a year ago, retail sales are down now for a second month in a row after having risen sharply for about a year: the incipient economic recovery has weakened,” Boyd wrote separately in the Data Alert.

While tax revenues have stopped falling off the cliff, Boyd concludes, state’s face a new cliff in the dissipating of federal stimulus funds and state fiscal problems are far from over.

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