Sales, Income Taxes Drive Modest State Revenue Increases

State tax revenues showed slight improvement in the third quarter of this year but they still have a long way to go to make up for the losses incurred by the recession, according to a report yesterday from the U.S. Census Bureau. Overall, state tax revenues increased 4.75 percent over the third quarter of 2009, but remain far below 2008 levels. Much of the increase  is due to a rebound in individual income and sales tax collections, which grew by 5 and 4.3 percent respectively.

The report is an indication that the fledgling economic recovery could be gaining momentum even as states prepare for another difficult budget year. As Stateline reported in November, a number of states have seen slight increases in tax revenues over the past few months and some could end the current fiscal year with a surplus. Crucial to the recovery will be sales tax receipts during the holiday season, the volume of which won’t be known until the start of the new year. Sales taxes cover about a third of states’ budgets.

“Revenue-wise they’re turning the corner,” University of Tennessee economics professor William Fox told The Wall Street Journal. Still, “fiscal stress is likely to continue in many states because spending is still out of line with lower revenues.”

At least 15 states will have to close budget gaps in the current fiscal year, according to a report this month from the National Conference of State Legislatures. But worse news lies in the near future. The end of the federal stimulus program and rising Medicaid costs will likely mean deficits for 35 states in the fiscal year that begins in July 2011.