States See Fourth Quarter Tax Revenue Slowdown

States had a prosperous year overall in 2000 with record surpluses and tax revenue growth. But there were signs of weakening economies in many states as the year drew to a close, and a new report suggests a major slowdown in tax collections could just be the tip of the iceberg.

Tax collections grew by four percent in the October-December 2000 quarter over the same period in 1999, making it the slowest quarter since spring of 1993, according to a report last week by the Nelson A. Rockefeller Institute Of Government’s fiscal studies program in Albany, N.Y.

After inflation adjustments, real tax revenue growth was only 1.6 percent, the report says, the weakest quarter in nearly eight years.

The report’s authors, Nicholas W. Jenny and Elizabeth I. Davis, estimate state tax revenue exceeded $110 billion in October-December 2000, an actual increase of $4.26 billion over the same quarter 1999.Last month, Jenny and Davis reported state tax revenue had grown by 8.7 percent for fiscal year 2000. That rate of growth was the fastest in a decade and stronger than many states had predicted.

This week’s report, however, showed an economic downturn that could unnerve state officials now wrestling with tighter budgets and smaller surpluses, Davis said.

“It really impacts how much the states can spend and how much they can cut taxes,” Davis said. “The last few years, they’ve been able to do both.”

According to the report, only 12 states saw tax revenues grow by more than 8 percent in the October-December quarter. Nine states experienced 5 to 8 percent growth while the remaining 29 states saw a tax-collection increase of less than 5 percent.

Geographically, some stark differences were apparent. The Great Lakes states had revenue growth of 0.6 percent, while the Plains states (2 percent) and Southeast states (2.2 percent) also felt a slowdown. On the opposite side of the spectrum, the Far West states had a growth rate of 9 percent, while the Southwest states (8 percent) and Rocky Mountain states (7.4 percent) were more prosperous. Tax revenue in the New England and Mid-Atlantic states both grew at 2.7 percent.

Growth in the personal income tax cooled down considerably. Although seven states had double-digit revenue growth, six states — Delaware, Iowa, Michigan, South Carolina, Virginia, and West Virginia — saw declines. Overall, personal income tax collections rose 6.5 percent that quarter, the weakest rate of growth in five years, the report says.

Sales tax and corporate income tax revenue also were weaker in the last quarter of 2000 compared to the same period in 1999. States collected only 4.1 percent more in sales taxes, a sharp contrast to earlier quarters which experienced higher growth rates. Certain regions, like the Great Lakes states and the Plains states, had nearly no growth in sales tax revenue.

Corporate income taxes also suffered a major slump in the October-December quarter, falling 7.7 percent to mark the second sharpest drop in a decade.

Jenny and Davis attribute the slowing growth to three general reasons: reduced revenue resulting from a seventh straight year of tax cuts; differences in states’ tax collection systems; and tax law changes affecting the October-December quarter.

Davis said as early as next month, states could experience an “inertia effect,” where tax revenue will remain at the relatively low rate of growth. She said uncertainty is being felt in many statehouses.

“States are saying, after this April, who knows? All bets are off,” she said. “They just don’t think they’re going to see that rate of growth again.”