SAN FRANCISCO - State tax revenues fell by the largest amount on record in the first three months of 2009 and probably fell further in the second quarter, according to a report by the Nelson A. Rockefeller Institute of Government.
Total state tax collections fell 11.7% in the first three months of the calendar year, compared to the same period a year earlier, according to Census Bureau data analyzed by Rockefeller Institute researchers Donald Boyd and Lucy Dadayan. That's the biggest decline in the 46 years for which data are available.
"The January-March quarter was the worst on record for states," Dadayan and Boyd said in a report published Friday. "Preliminary data for the April-June quarter suggest that fiscal conditions deteriorated even further."
The decline in state revenues has caused widespread chaos for state budgeters and credit rating downgrades for such states as California, Nevada, Ohio, Michigan, Illinois, and Rhode Island.
The Rockefeller Institute said the decline in state tax collections has been widespread. Tax revenue declined in 45 states in the first quarter of 2009, compared to 35 states in the fourth quarter of 2008. Regionally, the Far West and New England suffered the biggest declines, while the Plains and Rocky Mountain states had the smallest drops.
Ten states suffered declines of more than 15% in the first three months of the year. Alaska recorded the biggest decline at 72%. Populous states like California, New York, Michigan, Georgia and New Jersey were among the big decliners.
The declines hit all three major state revenue sources: personal income taxes fell 17.5%, corporate income taxes dropped 18.8%, and sales taxes dropped 8.3%.
The decline in sales taxes was the smallest among the three major revenue sources, but it was also the most unusual because sales taxes are usually the most stable of the cyclical revenue sources.
"This decline is far worse than the worst sales tax revenue decline in the previous recession," Dadayan and Boyd wrote. "In fact, the inflation-adjusted decline in state and local sales taxes was the greatest in the 45 years for which quarterly data exist."
While the report focused on state tax collections, it noted that local governments, which are dependent on the more stable property tax, actually saw taxes collections increase 3.9% in the first quarter.
The second quarter will be the big test for state personal income tax collection because it includes the annual April tax filings.
"Preliminary figures for the second quarter of 2009 indicate that the personal income tax declines will be far more severe compared to the last recession, when the largest decline was reported at 22.3% for the second quarter of 2002," Dadayan and Boyd wrote.
The researchers have compiled tax data through May for 45 states. They found a 33.2% drop in personal income tax collections from a year earlier and a 10% drop in sales taxes.
"Such extraordinary weakness in revenues, along with continued if more moderate growth in expenditures, make widespread budget shortfalls highly likely this year," they wrote.
States have taken "dramatic" actions to balance their budgets this year, Dadayan and Boyd said. While much of the budget-balancing actions have come from spending reductions, "almost every single state" has raised taxes or fees.
In California, for example, lawmakers closed a $41 billion budget gap that spanned two fiscal years with a combination of tax increases and spending cuts. But by May, the state faced another $24 billion budget gap due to continued revenue declines and voters' rejection of some of the tax hikes and spending cuts passed in February.
Lawmakers continued to negotiate Friday to close the deficit, and Controller John Chiang earlier this month began paying some state bills with IOUs, or registered warrants.
"The continued, sharp decline in revenues will likely force more unwanted choices for states in the months ahead," Dadayan and Boyd concluded.
