Stateline Story

Improved Tax Collections Help Battered State Budgets

States aren't exactly rolling in the dough, but last year they pulled in $35 billion more than the previous year, the second strongest showing since 1991, says a new report from the Nelson A. Rockefeller Institute of Government.

States garnered 7.5 percent more in revenue in fiscal 2004, according to the institute, the public policy research arm of the State University of New York. The fiscal year begins July 1 for all but four states (Alabama, Michigan, New York and Texas).

All three major state tax sources showed an uptick: personal income taxes rose by 8.4 percent, sales taxes grew 6.6 percent and corporate income taxes went up by 11.2 percent, the institute said.

"State revenue declined substantially during the previous two years, but last year's growth should aid states in repairing their strained budgets," Nicholas Jenny, a senior policy analyst at the institute, said in a statement. "But it will probably take another two or three years for all of the states to put the impact of the recession completely behind them," he said.

The far West region enjoyed the strongest growth at 10.5 percent, while the Plains experienced the weakest at 5.1 percent.

The seven-page report includes a list that breaks down by percentage points the changes in personal, sales and corporate tax revenues for each state.

Nine states boasted double-digit surges in personal income tax: California, Connecticut, Delaware, Hawaii, Louisiana, Maryland, Massachusetts, Montana and Nebraska.

Six states had double-digit growth in their sales tax collection: Idaho, Indiana, Nevada, New York, Ohio and Vermont.

Nevada has the strongest growth at 23.7 percent, due largely to a diverse tax package that included hikes in cigarette taxes and increases in business payroll taxes and gambling-related taxes. Only Mississippi and Michigan had revenue declines 0.5 and 0.1 percent respectively due to tax cuts.

The institute said this marks the first year of solid revenue growth after a sharp drop in fiscal 2002 and the second strongest growth since the institute began tracking state revenue in 1991.

The 2001 recession hit states hard. The national downturn cost people jobs and the high-tech crash brought sharp declines in stock market values, which meant states collected less in taxes.

The institute's Donald Boyd predicted earlier this year that states and localities would continue to face budget squeezes due to rising health care and education costs and possible federal tax overhauls.

"While the recovery in revenues will help states get their budget back in balance and begin to replenish reserves, states will continue, at least in the near-term, to face daunting risks from spending growth in major programs, and it is unlikely they will be able to take on new burdens," Boyd said.