WASHINGTON - State tax collections for the fourth quarter of 2008 declined for the first time in more than six years, and sales taxes were dealt a record-setting blow during that period, according to a report issued yesterday by the Nelson A. Rockefeller Institute of Government.

Tax collections have been less favorable than in previous periods for both state and local issuers, but the effect on future bond issuance will depend on factors such as the size of a city, sources said.

"Certainly reports like this will have a cloud relative to new issuance, and will certainly have a negative effect on the price, the cost of issuing new debt," said Lars Etzkorn, principal legislative counsel for the National League of Cities. "We like to see more optimistic news about all of the revenue sources. And anything that presents a cloud is going to cause the market to increase costs."

"Stimulus money has helped to fill some of the holes, but if the holes get bigger you've got an issue," said Scott Pattison, executive director of the National Association of State Budget Officers.

The report, authored by Donald J. Boyd and Lucy Dadayan, gave 2009 a gloomy forecast as well, saying that early signs indicate an overall decline in tax revenues of more than 12% over last year.

State corporate income tax was hit particularly hard, dropping by 15.5% over the fourth quarter of 2007, according to the report. In addition, income taxes and sales taxes dropped by 1.1% and 6.1%, respectively.

"In fact, the inflation-adjusted decline in state and local sales taxes was the greatest in the 50 years for which quarterly data are available," the report warned. Consumers are simply spending less money on goods because they are skittish about the economy and fear unemployment, it said.

With sales and corporate income taxes stumbling, personal income tax revenue accounted for at least a third of total tax revenue, and made up a larger share than did sales tax in more than half of the states in the country. Adding to the difficulty, states and localities may discover lower-than-expected income tax payments from tax returns being filed this month.

"Because the full extent of revenue declines may not be known immediately, there is great risk that state budget deals negotiated over the next month or two will have to be buttressed with additional spending cuts or tax increases as the year progresses," the institute cautioned.

Overall, state tax collections for the fourth quarter dropped 4.7% from the same time period in 2007, the report said, citing Census Bureau data.

When adjusted for inflation, legislative actions, and other factors, the institute found that total state tax revenue decreased in 41 states during the fourth quarter of 2008. Far West states were hit harder than other regions, losing 7.6% of total state taxes and 13.6% of sales taxes over the previous year, the report said. Plains states in some respects fared better than elsewhere in the country - state personal income tax revenue grew 2% in that region.

While state tax coffers dried up, however, local issuers saw an uptick in collections during the last quarter of 2008, the report said. This is partly due to local dependence on property tax to generate revenues.

Local tax collections rose by 3.2% between October and December. This contrasted the nearly 5% drop in state tax revenues during that time. But year-over-year growth in local taxes also has slowed during the past four quarters, to 1.6% from 3.4% a year ago.

The report is generally in line with a survey conducted in December and January by the National League of Cities. That survey found that 84% of cities were facing fiscal difficulties and that more than nine out of 10 cities expected to have trouble meeting their needs this year - the most pessimistic response in the survey's 23-year history.

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