Fiscal Report Sees Great Trouble Brewing for States

Arizona, California, Florida, Michigan, and Rhode Island currently are suffering the most from worsening U.S. economic problems, but Connecticut, New York, New Jersey and other states will soon be in the same boat, a leading state policy research center says.

In its latest quarterly report on state tax revenues, the Rockefeller Institute of Government warned Tuesday (Oct. 7) that “great trouble is brewing” for states as economic distress spreads from Wall Street and other financial markets into the larger economy.

The report said that while taxes collected by the 50 states from April 1 through June 30 grew by 3.6 percent over the same period in 2007, income tax payments accounted for most of the increase, masking declines in sales, fuel and corporate taxes. The Rockefeller Institute is the policy research arm of the State University of New York.

“Superficially, tax collections appeared to be doing okay – certainly not the leading edge of a fiscal crisis. But below the surface, great trouble is brewing,” report author Donald Boyd said. “Some states have already made mid-year budget cuts, and more widespread cuts are virtually certain as revenues deteriorate further.”

State income tax collections collectively grew 6.6 percent in the second quarter over a year earlier as taxpayers met the April 15 deadline to pay taxes on 2007 earnings. However, state sales taxes dropped 1.4 percent, corporate income taxes fell 8.3 percent, and motor fuel taxes declined 3.4 percent, the Rockefeller Institute found.

When adjusted for inflation, overall state tax collections rose 1.5 percent compared to a year earlier.

On top of the deteriorating revenue outlook, Boyd said the prices that state and localities pay for goods and services rose 6.6 percent during the second quarter, 4.6 percent higher than economy-wide inflation – the largest such difference in 60 years.

“States are again facing the classic nutcracker effect of slowing revenue and rising prices,” he said.