States See Record Tax Revenue Drops in 2Q

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WASHINGTON — State tax collections suffered from a record-setting decline in the second quarter of 2009, with almost all states reporting a drop in total tax revenue during the quarter, the Rockefeller Institute of Government said in a report issued yesterday.

During the second quarter, state tax revenue fell 16.6%, the sharpest deterioration since at least 1962, the analysts found in an examination of Census Bureau data.

When state and local tax collection data were combined, the institute found the same pattern: those revenues declined 12.2% during the second quarter.

However, state taxes have been hit much harder than local governments’ taxes during the past two quarters, the report said.

While states posted record declines, local governments collected only about 2.8% less overall tax revenue in the second quarter, “mostly due to declines in local income tax and sales tax collections,” analysts said.

Local governments rely heavily on property taxes, which are generally more stable revenue sources and rose “a surprising” 3.1% during the quarter. State property taxes declined by 1.9%.

The dismal revenue trend for states seems to be bleeding into this quarter as well, according to the report.

Its early data from July and August showed an 8% decline in overall tax collections, though data has been collected from only 36 states.

“I think when we have all states, and September, it is likely to be worse than 8% ... because September appears to be very bad,” said Donald J. Boyd, an analyst on the report. But the quarter may be slightly improved because the 27.5% decline in income tax collections from April to June “cannot continue at that rate,” Boyd said. “All of the bad news from 2008 income tax returns was compressed into that quarter.”

In addition, the second-quarter returns are adding to an ongoing slump. States reported earning $63 billion less in tax collections between June 2008 and June 2009 than what they earned in the preceding year.

“That loss is also a record, and is roughly twice the amount states gained during the year in fiscal relief from the federal stimulus package,” analysts Lucy Dadayan and Boyd said in the report.

Boyd said in a conference call with reporters that governors’ budget proposals in January probably will contain “more budget cuts and more tax increases.”

The analysts also found that overall economic indexes compiled by the group showed that fewer states had declining economies in August compared with three months earlier. But their budgets may not reflect an upturn.

“Some elements of the economy that are very important to state finances — particularly employment and wages — are likely to recover more slowly than gross domestic product. In addition, state tax revenue, when it does begin to recover, will be below its earlier peak for at least several years and will not be sufficient to support spending commitments that are now in place,” the Rockefeller Institute report said, adding that most states will probably have budget gaps until at least fiscal 2012.

All of this could have a stimulative effect on municipal bond issuance, Boyd said, adding the caveat that fiscal problems can also prompt states to delay capital projects and any new debt associated with them.

“Stimulus money is encouraging additional bonding for transportation, drinking water, and other projects, and those incentives will continue,” he said. “Build America Bonds are financially attractive. And fiscal problems can create opportunity and incentive for debt issuance,” sometimes but rarely for deficit notes, as well as for “gimmicky arrangements designed to obtain fiscal relief” such as pension obligation bonds and lottery bonds.

“Fiscal problems also create incentives — to the extent that governments carry through with capital plans — to fund more of those plans with bonds and less with general fund appropriations,” Boyd said. “So there are a lot of reasons to think debt issuance will actually increase in a circumstance like this, as long as capital markets are working well.”

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