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States Still in Steep Dive

WASHINGTON — Persistent declines in tax revenue continued to pummel states for another three months, making the third fiscal quarter the fourth consecutive quarter of double-digit declines, according to a Nelson A. Rockefeller Institute of Government report issued yesterday.

Tax revenue fell an overall 10.9% during the period from July through September and year-over-year tax revenue has averaged a 12.5% decline over the last four quarters, according to the group’s findings.

The first three quarters of 2009 were the worst decline in state tax collections since at least 1963, even when adjusted for inflation, the institute said.

“While the decline in state tax collections during the most recent quarter was not as sharp as the two preceding quarters, the continued downward trend in the four-quarter moving average illustrates the severity of the budget problems facing most states,” analysts Lucy Dadayan and Donald J. Boyd wrote.

“While the recession may be over for the national economy, it is far from over for the finances of state governments, and many states are still uncertain as to when to expect a return to positive revenue growth,” the analysts said.

State revenues “will continue seeing declines for another year or two (and for some states even several fiscal years) compared to their peak revenue years,” Dadayan said in an e-mail.

Western states, including the Southwest, Far West, and Rocky Mountain regions, were hardest hit by revenue declines.

Nearly every state reported tax revenue declines during the third quarter. Twenty-two of those states had double-digit drops, which was slightly better than the 36 that reported double-digit decreases in the preceding quarter.

Alaska had the worst decline — 65% — between July and September. The analysts noted that this was not wholly surprising, as high oil prices had given the state “unusually high” revenues in the recent past.

However, local governments reported less dismal revenue situations than states during the period. Overall local tax collections “showed modest growth” of 0.7% during the third quarter, the report said. This was partly due to local governments’ reliance on property taxes, a less volatile source of revenue. Local property taxes rose by 3.3% during the quarter, the report said. Local sales tax collections fell by 8.4% but accounted for only 15% of local governments’ tax collections.

Year-over-year local tax collections grew only 0.4% during the past four quarters, down from the 2.4% growth localities saw in the year before.

Despite the drag that continued tax declines are putting on states’ budgets, recent months included some positive signs, the institute said. Judging from nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and real wage and salary disbursements, the past few months brought “noticeable improvement in the typical state’s economic strength, and the declines as of November 2009 are no longer as deep compared to the previous recessions,” the analysts said.

But Dadayan added: “The only reason why we see slightly better figures for October and November months of state fiscal year 2010 is because we are comparing the figures to state fiscal year 2009, which was the worst year for many states.”

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