State taxes slow again in the January - March quarter 2008

according to the State Revenue Report July 2008 from the Nelson A Rockefeller Institute of Government.

Highlights from the report:
State tax collections were weak in the first quarter of 2008, rising only 1.7 percent over a year earlier. After adjusting for legislated tax changes and inflation in state and local government purchases, state tax revenue declined by 5.3 percent. This is the third quarter in a row that total adjusted revenue growth showed a decline. Sales tax revenues produced no growth for the first time in six years.

States collected $155.3 billion in the first quarter of calendar 2008, as shown in Table 10. Some $64.0 billion, or 41 percent, was from personal income taxes. Another $55.0 billion, or 35 percent, represented sales taxes, while corporate income taxes contributed $10.0 billion. Collections from all other taxes totaled $26.3 billion for the quarter. For fiscal year 2008 to date (July 2007 through March 2008), state tax revenues were $455.4 billion, up 3.0 percent from the same period last year. Total growth in state tax revenue in the first quarter of 2008 was barely one-third the historical average over the previous 37 quarters of 4.9 percent.

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According to this report the U.S. economy weakened further in the January - March period of 2008. State tax revenues rely heavily on income and sales taxes, therefore income and personal consumption are extremely important to this revenue sources. All data are adjusted for inflation. The time period covered is January 2000 through May 2008 (two months after the close of the quarter reported on here).

The report lists several important points:
Income and consumption have both slowed sharply. Real consumption is much weaker than wage and non-wage income, with virtually no year-over-year growth in recent months.
Income and consumption continued to weaken in April and May (after the period covered by this report), suggesting that tax collections are likely to deteriorate further.
Non-wage income historically has been more volatile than either wages or consumption. This income fell extremely sharply in the 2002-2003 period and the recent slowdown in this income—so far—pales in comparison to that period.

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Many state and local governments depend on their income tax revenue to close out budget gaps. Typically the April - June quarter marks a large spike in income tax revenues. Surprises in the amount of these spikes can wreak havoc on state finances because they come at the end of the state's fiscal year. Full information about the April - June payments is not available yet but early reports so far are quite good. Preliminary information suggested that final payments in April were up by more than 12 percent, with increases in many states, but that payments were down in many states in May. Nevertheless states appear to have dodged a bullet for the 2007 tax returns. The falling stock market and a slowing economy are cause for concern. This time next year could be quite gloomy.

The last chart illustrates that concern with the state economic coincidence indicators, released by the Federal Reserve Bank of Philadelphia, showing a sharp rise of the number of individual states with declining economies. (The dark blue color does not indicate that states are in an economic recession but rather a decline of activity vs. 3 months earlier.)

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source: State Taxes Slow Yet Again, and Further Weakening Appears Likely State Revenue Report, July 2008 Nelson A Rockefeller Institute of Government http://www.rockinst.org/WorkArea/showcontent.aspx?id=15100

read also: Tax revenues weaken, costs rise sharply
Thursday, April 3, 2008 http://manonthestreet64.blogspot.com/2008/04/state-revenue-report-from-rockefeller.html