WASHINGTON — State tax collections grew during the first quarter for the first time since 2008, the Nelson A. Rockefeller Institute of Government reported Tuesday, raising hope that the national economic recovery may finally be improving states’ fiscal fortunes.
Overall state tax revenues in the January to March quarter increased 2.5% from the same quarter a year ago, the first year-over-year growth since the third quarter of 2008, the report found. Adjusted for inflation, the total tax collections showed a gain of 2.0%.
But the optimism may be premature in that the report found the tax collection gains resulted primarily from tax increases passed by California and New York last year. Excluding California and New York, overall tax revenues dipped 1.5% for the remaining states, the institute reported. In all, 33 states reported total tax declines during the first quarter.
The California and New York tax increases “very much” tilted the numbers, but even without them, the state tax collections “were not a catastrophe,” said Donald Boyd, a fellow at the Rockefeller Institute and a co-author of the report. Total state tax increases boosted state revenue by about $4.9 billion during the quarter, according to the report.
States can “expect to see firming revenues” in the second half of 2010, but this recession “has been a slow recovery on things that matter for [state] budgets, like employment and wages,” he said.
Preliminary data from 42 states for April and May showed tax revenues increased 0.9% from the year-ago period, mostly due to increases in sales tax collections, the report said.
For many states, sales tax collections are the first to bounce back after a recession, Boyd said. States rely on sales taxes for about 31% of their revenue, according to the report. Retail sales data have increased “pretty significantly from the depths of the recession” and are a “major driver for sales taxes,” Boyd said.
Personal income tax collections remain the weakest segment of tax returns, plagued by a 9.5% national unemployment rate. States on average count on income taxes for about 36% of their tax revenues, the report said.
Corporate taxes “came back roaring” during the first quarter, but few states rely on corporate taxes, while federal tax receipts have benefited somewhat from the gain in corporate profits.
Local tax revenues declined 1.1%, led by drops in property and corporate tax collections, the first quarter in which local governments have reported a tax decline during the recession. Local tax collections had been stable, increasing by about 0.3% over the previous four quarters. But as property values have been revised lower, local governments are starting to feel greater fiscal pain, according to the report.
Preliminary state revenue figures for June have been mixed. On Monday, Georgia Gov. Sonny Perdue said that the state’s net revenue collections for June increased 3.8% from a year ago. But for fiscal 2010, which ended in June, total state taxes and other revenues declined 9.1% from the prior fiscal year.
Also on Monday, Washington State reported that revenue collections in June fell 3.3% from a year ago, following two consecutive months of year-over-year revenue increases.
Last month, Virginia reported that its May tax collections came in stronger than estimated and projected it would have a revenue surplus for June. The state’s May revenues posted the first back-to-back increases in sales and use taxes since 2007.
Governors at the National Governors Association conference last weekend expressed concerns of a “double-dip” recession. Boyd said governors are right to be pessimistic, but that it is often difficult for them “to separate economic gloom from fiscal gloom.”
He also cautioned states against expecting additional federal stimulus aid. The expiration of many stimulus programs created by the American Recovery and Reinvestment Act of 2009 means that 2011 will be “a hard year yet again,” he said.