Revenues in at least 28 states will exceed their fiscal 2011 budget forecasts as personal income and corporate taxes rebound, the Center on Budget Policies and Priorities said Monday.
In the 28 states that have reported so far for the fiscal year that ended June 30, personal income taxes jumped 9%, the CBPP said in a six-page report released Monday. The increase is more than double the 4.4% growth rate states’ estimated when these budgets were enacted, the center said.
The report was written by Elizabeth McNichol, Michael Leachman and Dylan Grundman.
California saw the strongest personal income tax gains with $2.8 billion above its initial estimate. But certain temporary taxes in the state’s fiscal 2012 budget will now be allowed to expire.
Corporate tax increases accounted for the largest percentage of revenue improvement in 13 states, the report said.
State sales taxes have increased, but the gain was not as strong. Sales taxes were 1.5 percentage points higher than the 2.9% collectively projected by states, according to the report.
While the gains in personal income taxes are good news for states, it also demonstrates the “volatility when incomes are rising or falling rapidly,” the CBPP said.
Income taxes rise and fall with capital gains, and amid the financial crisis — when stock prices plunged — income taxes fell dramatically. The report noted that for the 12 months ending in March, the Dow Jones Industrial Average was up 24.0%, while wage and salary disbursements went up 3.7%.
States should consider relying on a broader mix of taxes “to reduce the likelihood that all [taxes] fall simultaneously,” the center said. States can also set aside income taxes in a rainy-day fund when returns are strong, the report said.
States are starting to put their higher income-tax collections back into the budget, the report said. Oregon has used higher-than-expected revenues to restore cuts made in human services and public safety. Connecticut may be able to balance its 2012 budget with a little less borrowing than expected. New Jersey’s Gov. Chris Christie has accelerated the phase-in to full pension payments, the CBPP said.
Still, economic conditions at the state and local levels remain bleak. Municipal governments’ spending contracted 4.2% in the first quarter of this year, the largest contraction since 1981, the Commerce Department reported last month. Nonfarm payrolls fell in 27 states in May, the Labor Department reported during the same period.
States will maintain very deep spending cuts as revenues remain below pre-recession levels, the center said. States are passing budgets that are expected to close a combined $103 billion budget gap for fiscal 2012. Their best strategy going forward will be to balance spending cuts with efforts to strengthen revenues and tap reserves as needed, the report said.