Stateline Story

State Revenues -- Weakest Growth in Two Years

State tax revenues registered their weakest growth since September 2003 in the final months of last year, signaling a blip in states' gradual recovery from their worst fiscal crisis since World War II.

Tax collections grew 7.6 percent in the last quarter of 2005, less than the previous quarter and less than the same period a year before, according to the latest analysis of state revenues by the Nelson A. Rockefeller Institute of Government. Adjusted for inflation and tax changes, the growth rate was only 0.9 percent between October and December — the slowest adjusted growth in the last nine quarterly reports.

While corporate taxes continued their double-digit increases, growth in both sales and personal income taxes dipped to their lowest levels in more than two years, the March 16 report said.

A slowdown in the national economy could explain the weaker growth rates, along with the possibility that high-income individuals were deferring tax payments to early 2006, the report said.

"At this point, we're seeing one kind-of-weak quarter. Nobody's saying, 'Oh, my god, where's my revenue?'" said policy analyst Nicholas Jenny of the Rockefeller Institute, the public policy research arm of the State University of New York.

Corporate income tax collections were up 24.8 percent, compared to 27 percent in the same quarter the previous year. Revenue from personal income taxes increased 5.7 percent compared to 8.8 percent in the same period in 2004. Sales taxes for the period that included the 2005 Christmas shopping season grew 5.5 percent, compared to 6 percent during the previous holidays.

While revenues continued to increase modestly - compared to the drops between June 2001 and September 2003 that sent state budgets into the red - continuing weak growth could put a damper on states' high expectations for surpluses. Dozens of states currently are making plans to spend projected surpluses or to cut taxes. All but a handful of states are enjoying their brightest fiscal fortunes since the 2001 recession, which followed the technology bust and the Sept. 11 terrorist attacks.

Scott Pattison, executive director of the National Association of State Budget Officers, said that news of improving state budgets may have led to some unwarranted optimism. "It creates the impression that states are awash in money, but that's a false impression," he said.

While revenues have improved, so have the costs of services such as health care and education, he said. States will have a clearer idea of their budget picture after 2006 income tax returns are due.

Arturo Perez, a budget analyst for the National Conference of State Legislatures (NCSL), said states still are optimistic about their fiscal futures. But the picture might not look quite as rosy as it did late last year, and some may be revising their budget forecasts for the current fiscal year that ends June 30, he said.

NCSL is planning to release a survey of state fiscal conditions at an April conference in Washington, D.C.