State tax collections grew at an accelerating pace in the first three months of the year, with a number of states seeing the upswing continue into the second quarter.
Tax revenue grew 9.1% in the first quarter for 47 states that have reported collections, the fifth straight quarter of growth and the fastest rate in five years, according to a report released Tuesday by the Nelson A. Rockefeller Institute of Government.
State tax revenue is still 3.1% below the pre-recession levels of three years ago. And many states are facing a growing imbalance between revenue and longer-term expenses, particularly the expanding cost of employees’ pensions and health care.
The revenue gains, which were driven by a 12.4% jump in personal income taxes, reflect the improving economy as well as tax increases passed during the recession. Sales taxes grew 5.6% while corporation income taxes, which are volatile and make up only a small portion of states’ tax collections, grew 6.9% in the quarter.
The report comes as several states including New Jersey and Connecticut have reported better-than-expected tax collections into the second quarter. Last week, Texas’s comptroller raised that state’s revenue estimate for the next two fiscal years by $1.2 billion, to $78.5 billion.
Goldman Sachs, in a separate report Tuesday, said average state revenue in April was up 12% from a year ago for 11 big states—including California and New York—that the bank tracks. Much of that growth came from underlying strength in wages and retail sales rather than higher tax rates.
“If the current pace of revenue growth holds it could shave projected budget gaps by roughly $20 billion,” Alec Phillips, a Goldman Sachs economist, wrote in a note to clients. “Although a few states enacted high profile tax increases for this year, the most recent revenue gains appear to be due mostly to underlying economic strength.”
However, that doesn’t mean states are out of the woods.
“Many states still face fiscal challenges and are struggling in balancing budgets, particularly in the absence of federal stimulus money that they relied on for the last three years,” said Lucy Dadayan, a senior policy analyst at the Rockefeller Institute.
And while state finances are recovering, the outlook for local government revenue is starting to deteriorate. That’s because while states get most of their money from income and sales taxes, local governments rely more on property levies. Property taxes can take years to respond to falling home prices, and have only recently started to decline.
Improving state revenue is good news for the nation’s wobbly economic recovery. Fiscal troubles among state and local governments have weighed on economic growth during the past two years of recovery.
“While weakening in property tax revenues at the local level could offset some of this surprise, the state revenue trend nevertheless backs the notion that the drag on growth from the state and local sector should gradually fade over the next several quarters,” Mr. Phillips, of Goldman Sachs, wrote in his note.
Source: CONOR DOUGHERTY, The Walstreet Journal
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