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State Tax Revenue Still Falling

WASHINGTON — Tax revenues continued to fall in the July-to-September quarter of 2009 — the fourth consecutive quarter of decline — for all 44 states that reported their third-quarter results to the Rockefeller Institute of Government, according to its preliminary report released yesterday. Surprising revelations in the report include California’s relatively moderate year-over-year declines.

No states were spared from the recession’s drag on tax collections, the Rockefeller report said. All states reported losses, but Alaska suffered the most overall compared with last year, while the fiscally ailing California actually fared better than many states.

Overall state tax revenues fell nearly 11%, to $119.7 billion from $134 billion, compared with the same quarter last year. The worst-hit region for overall revenue was the Southwest, which saw a 21.5% total decline. The Southeast fared best, with an 8.1% drop. For states, Alaska had a 52.4% decline in overall revenue, followed by Vermont at 31.6% and Oklahoma at 28.4%. New Hampshire reported a mere 1.3% dip.

Personal income tax made up nearly 40% of revenue that states did collect, the report said. Even so, those revenues fell 11.4%, representing $6.7 billion of lost revenue. Every state that reported personal income taxes saw a decline in that category, and 21 of them reported double-digit drops. Alabama and Indiana had the worst numbers for third-quarter personal income taxes, dropping 26.7% and 20.3%, respectively.

Corporate income tax was the hardest-hit revenue category in the last quarter, with a 19.4% rate of decline. Nearly three-quarters of states said they had double-digit declines in corporate income tax collections.

Sales taxes fell by 8.2%, for a $3.8 billion loss over the same period last year. Seventeen states reported double-digit declines, although Massachusetts reported its sales tax collections grew 2.5% in the third quarter, mostly because of a sales tax increase, the report said.

“Past recessions were not as severe as this recession is,” said Lucy Dadayan, a Rockefeller analyst who authored the report together with analyst Donald J. Boyd. “We believe it’s going to be more than a year or two before we see some positive signs,” she said.

Dadayan added that context will be crucial in evaluating revenue changes two or three quarters from now. Although that is when states may begin to report positive changes in tax revenue flow, those modest improvements will initially pale by comparison to the many preceding months of revenue declines, she said.

Tax policy changes and external trends had a large effect on state revenues in the preliminary report.

Alaska’s revenues for the third quarter dropped more than 50% because of fluctuation in gasoline and oil prices last year compared with this year, and California’s relatively low rate of decline in tax revenue — 8.7% — is due to “temporary tax increases,” Dadayan said.

North Dakota had been the only state to report tax revenue growth during recent quarters, but it reported a 17.3% decline in the third quarter “mostly due to tax rate reductions in personal income and corporate income taxes and to several measures providing sales tax relief,” the report said.

But North Dakota was also the only state in the third quarter to report positive growth in employment, the report said.

Because states are facing such a prolonged period of distress, “further revenue shortfalls and more spending cuts are most likely on the way for many states,” the analysts said.

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