WASHINGTON — Reliance on volatile sources of tax revenue that swing in boom-and-bust cycles led to budget woes most states are currently facing, according to a new report published by the Tax Foundation.
The report, published Wednesday by the nonprofit educational group, which is based here, relies on data collected by the U.S. Census Bureau from July 1, 2008, to June 30, 2009. It shows 16 states had double-digit tax revenue declines in fiscal 2009 while five states, Iowa, North Dakota, Oregon, South Dakota, and Wyoming, posted tax revenue increases.
The states’ total tax revenue decreased 8.5% in fiscal 2009 following a 0.7% decline in fiscal 2008. Revenues in 2009 fell for corporate and individual income taxes as well as for sales taxes. Property taxes increased, but the report only included collections at the state level. The Census Bureau does not yet have complete data for property taxes collected at the municipal level.
State tax revenues, adjusted for inflation and population increases, declined 1.0% over the decade, the report said.
Kail Padgitt, an economist with the Tax Foundation and the author of the report, said some states are projecting revenue declines for fiscal 2010 as well.
States should view their tax policy “as simply the way to most efficiently raise revenue,” Padgitt said. “Otherwise [states] get into these boom and bust cycles,” he said.
This reality leaves states in a painful political position — they need to cut services just as constituents need them most, Padgitt said. States should rely on more stable tax sources, like taxes on groceries, rather than corporate taxes and taxes on high-income individuals, which tend to be more volatile, he suggested. In previous economic recoveries, sales tax revenue recovered first among the states’ revenue streams, he said.
“You really want to get states disciplined to look at how much they are going to earn as an average” from year to year, Padgitt said.
The drop in tax revenues through June 30, 2009, does not seem to correspond with states’ current credit ratings. Eight states were rated triple-A by Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings. Of those, Georgia, North Carolina, Virginia, and Utah had double-digit tax declines in fiscal 2009. South Carolina, which saw tax revenue fall 16.8%, is rated triple-A by Fitch and Moody’s.
The two lowest-rated states, California and Illinois, saw revenue declines of 15.0% and 8.6%, respectively. California is rated A1 by Moody’s and A-minus by Standard & Poor’s and Fitch. Illinois is rated Aa3 by Moody’s and A-plus by Standard & Poor’s and Fitch.
Analysts have warned that states’ financial pictures are not likely to improve this year because revenue losses lag the nation’s economic improvement.
In many cases, states relied on federal stimulus aid to plug budget gaps in 2009 and 2010. However, most of those funds will not be available to them after fiscal 2010.
The American Recovery and Reinvestment Act provided $135 billion in direct aid to state budgets, according to a Standard & Poor’s report published last month. States are likely to increase debt issuance to plug operating budget shortfalls as federal aid declines and their tax revenues lag the economic recovery, analysts said.
The lower tax revenues have forced state governments to impose hiring freezes, furloughs, and layoffs. State payrolls shrank by 5,000 in April, according the Bureau of Labor Statistics. Economists have said the state and local employment sector will be a drag on overall growth going forward.