Fourth Quarter State Revenue Figures Show No Slowdown

WASHINGTON – State tax revenue grew 7.5 percent in the fourth quarter of 1998 over the same period last year, marking the second strongest quarter of real revenue growth since the current economic boom began in 1992, according to a report issued today by the Nelson A. Rockefeller Center for the Study of the States. The strongest quarter in that time period was the second quarter of 1998.

Revenue growth was again driven by gains in personal income taxes, confounding the warnings of some economists that overall U.S. economic growth could not continue its extraordinary pace.

“Much of the states’ revenue growth is based on fragile phenomena that no prudent forecaster would bank on continuing at the pace of recent years. In particular, capital gains and other forms of non-wage income have grown extraordinarily rapidly, and history shows that these kind of events can and do reverse sharply,” said Don Boyd, co-author of the quarterly State Revenue Report and director of the Albany, New York think tank that sponsors it.

Established in 1990, the Center for the Study of the States is the state finance arm of the Rockefeller Institute of Government, the public policy research center for the State Universities of New York. The report is based on information gathered from state revenue officials, and in part from state budget offices and legislative staff.

Revenue growth was fairly consistent throughout the states, the report said. While the Southwest region experienced a 13.5 percent revenue growth, each of the other regions held steady between 5.8 and 7.9 percent.

Seven statesColorado, Delaware, Minnesota, New Hampshire, New Jersey, Oregon, and Texasreported double-digit tax revenue increases last quarter. None of these states were significantly affected by legislated tax actions, the report said.

While not counted by the states as tax revenue, initial tobacco settlement payments received by Minnesota and Texas ( million and $762 million, respectively) were deposited into their general funds and counted as revenue in the report. Without these funds, revenue growth would have been 7.3 percent in Minnesota, 4.3 percent in Texas.

Eight states reported declines in revenue: Alaska, Kansas, Nebraska, New Mexico, North Dakota, South Dakota, Vermont and Wyoming. Of these states, only legislative action in Kansas and Nebraska affected revenue collections. Both states enacted personal income and sales tax cuts.

The report identifies three underlying reasons for revenue collection trends: the nature of each state’s tax system, differences in states economies and recent tax legislation. States that rely heavily on personal income taxes usually have larger increases because that tax tends to grow faster than others do in normal times, the report said.

“Tax revenue that is based on the broader economy did not grow so rapidly in the latest quarter,” Boyd said. “Withholding growth slowed slightly, and sales tax growth muddled along. This is not cause for concern, but is not anywhere near as rapid as overall tax revenue growth, the sort of growth the states should not plan on going forward.”

Unadjusted for legislated tax changes, personal income tax collections increased 9.5 percent in the fourth quarter. This increase was due in part to a surprisingly large 23 percent growth in estimated income tax payments, the report said.

Twelve statesArizona, Arkansas, California, Colorado, Georgia, Louisiana, Maine, Minnesota, Mississippi, Montana, New Jersey and Oregonhad double-digit income tax revenue increases.

Except for Oregon, none of the twelve were significantly affected by legislated income tax changes. Personal income tax growth in New York and Oklahoma would have reached double digits had not legislative action depressed collections. Absent a complicated system in which New York’s income tax revenue is tied to local property tax relief, income tax revenue there would have grown 19.9 percent in the fourth quarter.

Sales tax revenue in the fourth quarter grew 5.5 percent over last year’s fourth quarter. Only three statesColorado, Nevada and South Carolinahad double-digit percent growth.

Five statesNebraska, New Mexico, North Dakota, Vermont and Wyoming experienced a reduction in sales tax revenue compared to the fourth quarter of last year. Of these states, only Nebraska’s revenue was affected by a legislated tax cut. Georgia, Maine, Missouri and North Carolina also enacted sales tax cuts that significantly depressed revenue collections for the fourth quarter.

“A number of analysts we spoke with noted that there had been modest slowing in sales tax growth, but none viewed it as a cause for alarm,” Boyd said.

The report indicates that while corporate tax collections increased by 5.2 percent last quarter, there was no evidence supporting a long-term reversal in the collections declines experienced in each of the two previous quarters.

Although weak or negative growth in corporate income taxes is not uncommon within one state for a single quarter, Boyd said, it is difficult to explain the why the aggregate corporate income tax has seen several quarters of weakness and decline over the past two years.

“I don’t think we know anything from data on corporate profits that would suggest some new trend is underway, despite opinions apparent in stock markets. Corporate tax collections are extraordinarily volatile, in part because corporate profits are volatile, but for other reasons as well,” Boyd said.

Twenty-one states had double-digit corporate income tax growth rates, and fifteen experienced a decline in collections compared to the same period last year. While the corporate income tax is the most volatile tracked in the report, the authors downplay its importance since it only represents 7 percent of total state tax revenue.

While revenue growth continues apace with the current economic good times, state data from the past four quarters shows weakening employment growth. No states showed more than a one- percent increase in non-farm employment last quarter and two states, New Hampshire and Hawaii, showed declines in overall employment.

“Generally, the national figures are a better measure of aggregate employment growth, but sometimes data for individual states incorporate information not yet reflected in the national data, yielding insights into the economy’s strength,” the report said.