Thursday, April 3, 2008

Tax revenues weaken, costs rise sharply

The State Revenue Report from the Rockefeller Institute of Government shows that state tax collections were up slightly in the fourth quarter, but at their weakest level in five years. After adjusting for inflation revenues declined by 4.3 percent, this was the second drop in a row. All three major state taxes showed weaker year over year growth in nominal terms.

Inflation increased in the fourth quarter, measured by the state and local government consumption expenditure index, reaching 6.2 percent compared to 4.1 percent for the same quarter of the previous year. State tax revenues increased by almost $1.2 billion in net enacted tax changes for the quarter, according to the National Conference of State Legislatures (NCSL). When the effects of enacted tax cuts and inflation are considered, real adjusted state tax revenue decreased by 4.3 percent.

State and Localities are feeling the pinch when it comes to inflation. The Bureau of Economic Analysis (BEA) price index for government expenditures, that is analog but different from the BLS's consumer price index, shows that inflation for state and local expenditures have diverged sharply from other comparable measures in the last three years.

In the fourth quarter of 2007, inflation for state/local expenditures was 6.2 percent, or 3.6 percentage points above the analogous measure for the national economy. That disparity was the largest recorded at least since 1990.

This are indeed very troubling times not only for the individual but also for State and local governments, which are squeezed between a decline in revenues and a sizable increase in inflation. On top of that are the problems in the auction rate bond market, that is putting additional pressure on the revenue side of local governments.

States are experiencing a classic nutcracker effect: Costs are rising sharply just as revenues falter. The result may be a squeeze on states’ ability to fund services. The national economic slowdown — or recession— is likely to depress state revenues, at least during the first quarter of 2008. Actions by the Federal Reserve, the fiscal stimulus plan enacted by President Bush and Congress, and other economic forces will all produce results that are difficult to project. One apparently safe prediction: A very difficult year for state budgetmakers.

update: Thu. Apr 4th, 3:00 p.m.
In Fig. 1 tax revenues are adjusted among other things for inflation and therefore represent the purchasing power that states obtained from their taxes. By this measure revenues fell by more than 4 percent.

source: State Tax Revenue Weakens Still Further, While Costs Rise Sharply
The State Revenue Report from the Rockefeller Institute of Government

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