WASHINGTON — State tax revenues continued to rebound in the second quarter but stock market volatility combined with recession jitters in August could affect tax collections in the third quarter, the Rockefeller Institute said Thursday.
The preliminary data show 46 states reported personal income tax growth for the April to June quarter. The states said total tax revenue increased by 11.4% compared to the second quarter of 2010, the strongest year-over-year growth since 2005. Tax collections have increased for six consecutive quarters after five quarters of declines.
Still, the revenue figures could have been better.
“To be perfectly honest, given the situation with the economy, I was hoping to see much stronger numbers” for the second quarter, said Lucy Dadayan, a senior policy analyst at Rockefeller and the author of Thursday’s report. She noted that the figures are preliminary and will be revised once the Census Bureau reports its data.
Dadayan said she was hoping revenue collection figures would reach their pre-financial crisis levels in dollar terms. Second-quarter figures were 7.8% below the level reached in the second quarter of 2008.
A slowdown in revenue growth for the third quarter may not threaten state revenues initially, as states tend to lag the national economy.
“It takes time for states’ revenues to catch up with [a] recession, so I don’t believe in the third quarter we will see much of what’s happening in the economy reflected in” revenue figures, Dadayan said. Economic weakness will “catch up” with the states if any slowdown is drawn out, she added.
Still, Dadayan said she is optimistic that states “will still see continued growth” in third-quarter tax collections.
In the second quarter, states reported personal income and corporate tax revenues each increased by 16.5%. Sales tax returns grew 5.9%. New York and California reported the largest increases in overall tax collections with gains of $2.9 billion and $2.3 billion, respectively. In all, 21 states reported double-digit growth in total tax collections.
New Hampshire was the only state to report a decline in overall tax collections.
Personal income taxes are closely tied to capital gains, making the revenue stream highly dependent on stock market gains and losses.
The August stock market volatility “absolutely” poses a risk to states’ revenues, Dadayan said, adding that “there is a direct link” between stock market returns and personal income taxes.
During the recession, state sales tax collections did not fall as dramatically as personal income revenue, according to Dadayan. But sales taxes make up a smaller portion of total tax collections than revenue from income taxes.
States are looking to diversify away from personal income taxes, and the share of income taxes as a portion of budget revenues “has actually gone down” in the last three to four years, she said.
However, “income taxes still remain one of the major sources for revenues for states,” Dadayan said.