Analysis

Tax Revenue Grows But Full Recovery Eludes 26 States

Nationally, total state tax revenue has recovered from its plunge during the Great Recession, thanks to factors such as North Dakota’s oil boom and tax increases in Illinois, California, and elsewhere. But the recovery is uneven. Adjusted for inflation, tax collections in 26 states had not fully rebounded by the final quarter of 2013.

In real terms, total tax revenue for the 50 states recovered to its previous peak in mid-2013. By the end of the year, after 16 straight quarters of growth, it hit a new high of 2.2 percent above the peak it reached in the third quarter of 2008, after adjusting for inflation and seasonal fluctuations. Download the data.

This means that for every $1 collected at their combined 2008 peak, states had about $1.02 in purchasing power in the final quarter of 2013.

But state-by-state results varied dramatically, showing the range of fiscal pressures still weighing on some state budgets after the 2007-09 recession.

A comparison of each state’s peak revenue before the end of the recession and its tax receipts in the fourth quarter of 2013, averaged across four quarters and adjusted for inflation, reveals that: 

  • Alaska was furthest from its peak, down 59.9 percent. But, its 2008 peak was due to a short-lived windfall from a new state oil tax that took effect just as crude prices spiked to record levels.
  • Four other states’ receipts also were still down more than 15 percent from previous peaks: Wyoming (-27.6 percent), Florida (-20.2 percent), New Mexico (-17.9 percent), and Louisiana (-15.2 percent).
  • North Dakota led all states, with tax revenue skyrocketing to 119.4 percent above its highest point. As receipts from sales and severance taxes soared, the state cut income and property taxes.
  • The next-largest rebounds were in Illinois (23.4 percent) and Minnesota (20.6 percent). Tax increases imposed after the recession contributed to both states’ revenue growth.

(See more analysis of tax revenue results for the fourth quarter of 2013 here.)

In states where tax revenue remains below its previous peak, policymakers are likely to continue facing tough trade-offs in balancing budgets, including pressure to catch up on investments and spending postponed during the downturn.

Even a return to peak levels can leave states with little extra to make up for cuts in federal aid or to pay for costs associated with population increases, growth in Medicaid enrollment, deferred needs, and accumulated debts. A return to peak tax revenue levels does not necessarily signal an economic comeback, because revenue growth can result from tax increases or other policy changes. More than half of the 24 states that are collecting more money than at their inflation-adjusted peak have raised taxes since the start of the recession.

Without adjusting for inflation, 50-state quarterly tax revenue was 10.2 percent above peak, and tax collections had recovered in 37 states as of the end of 2013. But unadjusted figures do not take into account changes in the price of goods and services.

Adjusting for inflation is just one way to evaluate state tax revenue growth. Different insights would be gained by tracking revenue relative to population growth or state economic output.

Analysis by Barb Rosewicz and Alex Boucher

 

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