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Taxation

States on a 'Revenue Roller Coaster'

WASHINGTON — State tax revenues rose 2.7% in the third quarter of last year, the eleventh consecutive quarter of growth, the Rockefeller Institute of Government reported Tuesday.

The Institute's 26-page report indicates slightly weaker fiscal conditions for states than the preliminary data released in December by the Census Bureau, which reported an overall increase of 2.9%.

"Despite increases over eleven quarters — nearly three years of continual gains — overall tax collections are still comparatively weak by recent historical standards," wrote Lucy Dadayan, senior policy analyst at the Institute, and Donald Boyd, co-authors of the report.

Additionally, growth in state tax collections has been softening in the last five quarters.

Revenues were 1.4% higher in the third quarter of 2012 than in the same quarter of 2008. Total state tax collections in the third quarter of 2012 were above the peak levels in most states, the report said.

Thirty-seven states reported higher tax revenue collections than in the same quarter of 2008.

In twenty-two states, total tax collections in fiscal year 2012 were still below peak levels, the report said.

The southwest and rocky mountain states showed the largest total tax revenue gains in the third quarter of 2012, even though their revenues remain below peak levels.

"Year-end actions by taxpayers to minimize their expected federal tax liability in light of the 'fiscal cliff' and federal actions to avert the cliff are likely to boost state income taxes in the October-December quarter and in the first and second quarters of 2013," the report noted.

However, these year-end actions are likely to depress state income and tax revenue slightly in fiscal years 2013 and 2014.

The report discussed how prior to the passage of the "fiscal cliff" agreement, some taxpayers knew there was a good chance that effective tax rates on some income would increase and therefore created incentives for taxpayers to shift their income around in order to minimize expected tax burdens. These shifts tend to affect state income taxes as well.

"States are on a revenue roller coaster, and there is a bumpy ride ahead," Dadayan and Boyd wrote. "It will be hard for states to interpret revenue data in coming months, and hard to rule out the possibility that any short-run revenue surge is simply borrowed from the future. It will be tempting to treat unexpected revenue growth as a sign of continuing economic improvement, when it could mean instead that future revenue will be lower. Caution should be the watchword."

Preliminary data for the October through November months of 2012 suggest that tax conditions continued to improve in the fourth quarter increasing by 5.8% compared to the same months in the previous year.

The report said that economic factors suggest that state tax revenues are recovering but not as quickly as the overall U.S. economy.

"States should revisit the composition of tax their tax structures and consider broadening tax bases to achieve more predictable and less volatile tax revenues," Dadayan and Boyd wrote.

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