State and Local Tax Receipts Rise a Bit in 1Q

Combined state and local government tax receipts rose modestly in the first quarter as the revenue sources most sensitive to swings in the economy picked up along with economic growth.

States and localities collected $299.1 billion in taxes in the first quarter, the Census Bureau reported Tuesday. The 0.82% increase in receipts was the second straight year-over-year perk-up in tax collections, following a full year of declines that at their depths reached double-digits.

The slight rebound is mainly attributable to income tax collections, which jumped 2.8% to $58.23 billion. Personal income in the U.S. climbed 2% in the first quarter, the Commerce Department reported earlier this week.

Sales taxes also ticked up slightly, to $69.87 billion from $69.68 billion.

The uptick in income and sales taxes is welcome news for municipal governments, which suffered a 5.8% squeeze in tax receipts last year during the most severe economic contraction since the Great Depression.

The recession was particularly brutal for states, which rely more on income and sales taxes — the very forms of tax collections most susceptible to economic downturns.

State tax receipts leaped 2.5% to $164.5 billion in the first three months of the year, the first year-over-year increase in five quarters. The economy grew 2.4% in the first quarter.

Local governments tend to be less susceptible to economic downturns because they rely more heavily on property taxes. Property tax receipts remained stable all through the housing crisis and the recession because governments generally charge property taxes on real estate based on the last assessed valuation, which is often years earlier.

Even as housing prices tumbled in 2008 and 2009, local governments often continued to assess tax rates against property values determined before the real estate bubble burst.

In the first quarter, real estate valuations finally began to catch up. Property tax collections dipped modestly to $107.7 billion, the first year-over-year decline since 2003. As a result, local government tax receipts fell 1.1% in the first quarter.

A report released earlier this month by the National Governors Association and the National Association of State Budget Officers cited falling revenue as a major reason states have cut annual general fund spending by 6.8%, to $612.9 billion.

States anticipate tax receipts will rise 3.9% in fiscal 2011, which begins in July, according to the report.

State revenue recoveries typically lag national economic recoveries, according to the report, so receipts are likely to remain sluggish this year and next.

Even with modest revenue growth, the report said, states will have to trim more from their budgets.

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Washington
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