State Tax Revenue Fell Sharply in Fiscal 2002

After posting significant gains from 1995 through 2001, state tax revenue fell sharply in fiscal year 2002, declining 5.6 percent across all states, according to a new report from the Rockefeller Institute of Government.

The Rockefeller report A Bad Year: Fiscal Year 2002 Tax Revenue Summary notes that the decline is even steeper, coming in at 7.7 percent, when changes to the tax code and inflation are factored in.

“It was the worst revenue performance we’ve seen,” Rockefeller fiscal analyst Nick Jenny told Stateline.org. Rockefeller, a nonpartisan public policy research center based at the State University of New York Albany, started tracking state tax revenue in 1991.

The worst performing state taxes were the personal income tax, which declined 10.8 percent, and the corporate income tax, which declined 18.8 percent. The sales tax, meantime, increased 0.6 percent, making it the strongest performing major state tax during fiscal year 2002, which ran from July 1, 2001, through June 30, 2002, for all but four states.

Rockefeller attributes the overall revenue decline to the national recession that started around March 2001. Two years later, the economy is still sputtering and state coffers have yet to recover. Jenny said his research indicates that overall state tax revenue has been flat so far during fiscal year 2003, although it will be some time before final numbers are available.

The revenue hit from the recession was most significant in high-income states such as California, Massachusetts and Oregon, which draw a significant percentage of their tax revenues from personal investment income. From fiscal year 2001 to 2002, California’s revenues fell 17.6 percent, Massachusetts’ revenues fell 14.6 percent and Oregon’s fell 20.3 percent, according to the report.

Rockefeller notes, however, that these states were more flush than most at the beginning of the downturn because they had reaped significant gains during the boom times of the 1990’s. So while their fall was steep, it was from a higher-than-average level.

“It’s a down year equivalent to one of the better up years in the 1990’s, so it doesn’t unravel all of that, but of course it puts state budget planning in a pretty bad situation,” Jenny said.

Jenny added that many states are predicting a slight increase in their revenue during fiscal year 2004, basing their optimism on a hoped-for recovery of the national economy.