State tax revenues increased 5.2% in the fourth quarter of 2012, but this should not be a cause for celebration, analysts warned in a Rockefeller Institute of Government report Wednesday.
Institute analysts Lucy Dadayan and Donald Boyd said that in the final months of 2012, taxpayers took actions to minimize federal tax liability in an effort to, prospectively, ameliorate the effects of the “fiscal cliff.”
Evidence of this can be found in the estimated taxes on income not subject to withholding tax, they said. In 38 states, the median payment for the fourth quarter payment rose 25.2% from one-year ago, up sharply from the 6.7% median growth for the first three payments, the 23-page report said.
These year-end actions by taxpayers are “likely to depress state income tax revenue slightly in 2013-2014 state fiscal years,” the report said.
Six states —New Jersey, Michigan, Minnesota, South Dakota, Alabama, and Wyoming — reported declines in total tax revenues in the fourth quarter of 2012 compared to the same time one year ago. Seven states reported double-digit increases in the fourth quarter.
State tax revenues are improving, but not as quickly as the rate of the broader economy. The report shows that state tax revenues are more reliant on narrower and more volatile forms of economic activity. In the past decade, state tax revenues have become more volatile and temporary solutions to address budget shortfalls during the Great Recession “might have contributed to further growth of revenue volatility,” it said.
The report suggests that states review the composition of their tax structures and consider broadening tax bases to achieve more predictable and less volatile tax revenues.
“Despite increases over twelve quarters — a full three years of continual gains — overall tax collections are still comparatively weak by recent historical standards,” Dadayan and Boyd wrote. “While the Great Recession ended over three years ago, the damage caused by the Great Recession on state tax revenues is significant and it will take years before states fully recover.”
The average quarterly growth rate in total tax collections in the last 25 years was around 5%. State tax revenues were 8.9% higher in the fourth quarter of 2012 than in the same quarter in 2007. The report said that revenues would have had to grow by more than 12.5% to keep up with population growth and inflation.
Overall state tax revenues in the fourth quarter of 2012 were above previous peak levels in most states, with 36 states reporting higher tax revenue collections than in the same quarter of 2007, the beginning of the recession.
“This is the first time since the start of the Great Recession that inflation-adjusted quarterly state tax collections are higher compared to the peak levels, although the most recent quarter was artificially boosted,” the report said.
Another element impacting trends in state tax revenue changes during the fourth quarter was tax increases and decreases that were enacted, which produced an estimated gain of $1.7 billion compared to the same period in 2011.
Local tax revenues grew for the third consecutive quarter after six consecutive quarters of decline. Local taxes grew by an average of 2.3% over the last four quarters, compared with the 2.4% decline in the previous year.
While this is a significant improvement, local tax collections have been relatively weak over the past three years in part due to falling house prices on property taxes. The largest year-over-year growth in local taxes in recent history was in the third quarter of 2005 at 5.8%, according to the report.
The report was based off of Census Bureau quarterly data and data collected by the Rockefeller Institute.
