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States' Tax Revenue Growth Softened in 4th Quarter

WASHINGON — State tax revenue growth weakened in the fourth quarter of 2011 due to weak economic conditions as well as the expiration of temporary tax increases and the stimulus provisions of the American Recovery and Reinvestment Act of 2009, the Rockefeller Institute said in a report Monday.

The preliminary data show all 50 states’ collections from major tax sources increased by 2.7% in the fourth quarter of 2011 compared to the same quarter of 2010 — the lowest growth rate since mid-2010.

The report said this is a “noticeable slowdown” from the 11.1% and 6.1% year-over-year growth reported in the second and third quarters of 2011 respectively.

Legislative changes in California and Illinois affected year-over-year gains in the fourth quarter. California saw a decline in total tax revenues of 8.9% while Illinois saw an increase of 24.1%. Excluding those two states, overall state tax receipts during the quarter were 4.4% higher than the previous year.

“In general, softening of tax revenues in the fourth quarter were not surprising,” said Lucy Dadayan, a senior policy analyst at Rockefeller and the author of Monday’s report. “Most states would likely continue seeing growth in tax revenue collections in 2012. However, such growth would be moderate and close to historical averages.”

The Rockefeller figures are preliminary and will be revised once the Census Bureau reports its data for the fourth quarter, according to the institute.

Forty-one states reported gains in total tax revenues during the fourth quarter while nine reported declines. Personal income taxes rose overall by 3.5%, a considerable slowdown from 10.1% year-over-year growth reported in the third quarter of 2011. Sales taxes for all states also showed modest growth of 1.8% for the period.

After five consecutive quarters of growth, corporate income taxes declined 3.8% in the fourth quarter of 2011, the report said. “Slow tax revenue recovery is mostly due to the overall weak economy and high unemployment rates,” Dadayan said. She added that states’ budgetary pressures, driven by growing health care and education obligations, have also been contributing factors.

Illinois reported the largest increase in overall collections with $1.2 billion, or 24%, mostly due to personal income tax hikes that took effect as of January 2011. State lawmakers raised the personal income tax to 5% from 3%, a 66% increase. The adjusted rate will carry through 2015, when it will drop to 3.25%.

Eight states reported double-digit growth in total tax collections when compared with the fourth quarter of 2010. Four states saw double-digit growth in personal income taxes while four states saw similar percentage gains in sales tax revenue. Among states reporting declines in overall tax collections, California reported the largest drop of $2.4 billion or 8.9%, the report said.

Personal income as well as sales taxes are the largest tax-revenue generators for states. During the recession states experienced large declines in personal income tax and the largest declines in overall tax collections since the Great Depression, according to Dadayan.

As a result, states have been diversifying their sources of tax revenues. They have allowed temporary taxes to expire; raised health-care provider taxes in order to address rising Medicaid costs; broadened major tax bases by reducing credits and exemptions; targeted online sales, and generated new revenue through fees and other non-tax actions.

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