WASHINGTON- Spurred by an 11.2% increase in income tax collections nationwide, total state tax revenue rose 6.9% during fiscal year 1998, according to a report released today by the Center for the Study of the States.
Revenue collections from income, sales, and corporate taxes exceeded original budget estimates by $11 billion dollars, and were higher than expected in 45 states.
According to the report, this marked the fourth year in a row that states collected more tax money than originally budgeted.
“The extraordinary revenue growth reflected much stronger economic growth than most state and private forecasters had predicted,” said Don Boyd, co-author of the report and director of the Albany, N.Y. think tank that conducted it.
Established in May 1990, the Center for the Study of the States is the state finance element of the Rockefeller Institute of Government, the public policy research center for the State Universities of New York. Research for the report was funded in part by grants from the Ford Foundation and the Smith Richardson Foundation.
Regionally, the Rocky Mountain area and the Far West experienced the fastest growth in the country with 9.6% and 8.0% growth respectively. Colorado had the strongest revenue growth increase at 13.3% and Delaware was second at 13.1%.
The Far West states recorded a 17.3% increase in personal income tax revenue, highest in the nation. California’s 19.2% personal income tax gain was tops among all states.
Revenue estimators at the Center believe that capital gains and other non-wage forms of income were once again driven up by a strong though volatile stock market, leading to personal income tax growth larger than expected.
While analysts contend that the current pace of revenue growth cannot continue unabated, they are quick to admit they have been predicting a slowdown for the past two years.
“One of the problems is that state revenue estimators don’t understand fully where all of the revenue has come from,” Boyd said. “Unfortunately, stock markets are fickle, and capital gains can decline. States should be cautious about embarking on tax cuts or spending programs that assume their fortunes in coming years will be as good as in the past few, which clearly are certainly unsustainable over the longer term.”
According to the report, states enacted an aggregate net tax cut of $5.3 billion in fiscal year 1998, slightly higher than fiscal 1997’s $4.9 billion net cut. The net tax cut represents 1.3% of total state tax revenue.
Twenty-nine states enacted tax cuts during fiscal 1998, while nine states increased taxes. Most of the increases came on cigarette and motor fuel taxes. Alaska and Wisconsin enacted the largest cigarette tax increases, while Michigan and Utah led in fuel tax increases.
Personal income and sales taxes were the most widely cut. Colorado, Maine, Massachusetts, Minnesota, Nebraska, New Mexico, New York, and Oregon had income or sales tax cuts significant enough to depress total tax revenue by more than three percent, the study said.
Of these states, Oregon’s tax cuts had the most profound effects on revenue growth. Adjusted for tax cuts, Oregon’s percent change in total tax revenue soared from 0.1% to 13%. This was due largely to Oregon’s $441 million personal income tax rebate, the study said.
With fiscal year 1999 already more than halfway completed, the Center’s State Fiscal Brief projected another better than expected year for state tax collections. The final numbers will depend heavily on 1998 tax returns due in April.
“These payments are volatile, hard to predict, and almost always surprising, but the surprise can be in either direction,” the report said. “Absent a large negative surprise, many states will end fiscal year 1999 with more revenue than originally expected.”
Revenue analysts are once again worrying that financial markets cannot continue to produce the outsized gains that have become commonplace in recent years. Revenue projections are being tempered, but that doesn’t necessarily mean a slowdown in tax cuts, the report said.
“State finances are in the best shape they have been in for more than a decade, thanks in large part to roaring stock markets,” Boyd said. “While there is no sign yet of slowing, state planners should keep in mind the extraordinary nature of the last few years. States would be unwise to assume that tax revenue and stock market gains will continue to grow as rapidly.”
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