States Look to Santa for Revenue Gift

By: - November 18, 2010 12:00 am


Heading into the critical holiday shopping season, state officials are reporting steady although modest gains in monthly tax collections, a sign that the nascent economic recovery is gaining strength after three years of plunging sales tax revenues that decimated state budgets.

November and December are the crucial months for state sales tax collections, which make up a third of state revenues. The big question for state governments this year, as Robert Ward of the Rockefeller Institute of Government puts it, is “Will Santa bring lots of Christmas toys?”

In recent days, officials in 27 states have said that year-over-year monthly revenues are increasing and some are forecasting a rise in tax receipts in state budgets for the fiscal year that begins July 1.

Iowa could finish the current budget year with a surplus of nearly billion because of higher-than-forecast tax receiptsOklahoma and West Virginia have posted six straight months of revenue increases. Kentucky’s budget director says the state could end the current fiscal year with a million cushion if current trends hold. Minnesota collected million more than predicted between July and September, allowing the state to trim its 2010 budget shortfall to million.

By contrast, a year ago at this time state revenues  were in a free fall, shattering forecasts and setting off almost monthly rounds of spending cuts in some states. Governors were preparing bleak budgets for fiscal 2011 that contemplated nearly billion combined in cuts and tax increases. A big reason for the discouragement was an unexpected decline in consumer spending, which led to a fall in sales tax collections, usually a stable revenue source that is easy for state forecasters to predict each year.

Sales tax comeback

Source: Stateline reporting

Improved sales tax receipts are leading the revenue recovery in most states. Tennessee’s monthly sales tax collections are growing at their highest rate in 43 months. In hard-hit California, sales tax receipts have been up for four straight months, with October showing the highest year-over-year increase at 13.1 percent. Oklahoma also reported double digit gains (14 percent) in sales tax collections. Even in Illinois, where overall revenue is down, sales tax receipts rose 5 percent.

Buoyed by automobile purchases, retail sales rose nationally 1.2 percent in October, the Commerce Department said Monday (Nov. 15), a sign of improving consumer confidence that analysts hope will continue during the all-important holiday season.  “We’ll know by early January how the sales tax played out for states,” says Arturo Perez, a fiscal analyst at the National Conference of State Legislatures.  NCSL is scheduled to release a report on state fiscal conditions at its annual fall forum Dec. 8-10 in Phoenix.

Corporate tax revenue also is up in many states, consistent with the rise in business profits nationally. Maine’s million revenue surplus is fueled by corporate income taxes; sales taxes there actually are below estimates. In Colorado, corporate income taxes increased 23.4 percent more than forecast in September. Arizona posted a 73 percent gain in corporate tax collections in September, although overall state revenue is not growing.

Wyoming is a good example of what a difference a year makes. Last December, Governor Dave Freudenthal proposed a budget cutting spending by million, largely due to a decline in energy tax revenue.”The world is different,” he said then. Now, as Freudenthal prepares his last budget before leaving office in January, the world has changed again. State officials are predicting that a precipitous rise in energy tax receipts will cause the 2012 budget to swell by million over the January 2010 estimate. That’s on top of about million in reserves the state banked through June 30. 

Stimulus ending

Still, there is a flip side to Wyoming’s recovering revenue picture that puts the situation in all states in perspective. Wyoming may appear to have an estimated .2 billion in extra cash next year, but most of that will be needed to make up for the loss of federal stimulus money and mounting Medicaid and public pension costs. “I would encourage people to view this with caution, in that much of the money is already spoken for,” Freudenthal says .

Most states do not have surplus revenues, which means they will have to cut spending, raise taxes, borrow or tap reserves to balance their budgets for the fiscal year that begins July 1. NCSL is projecting that states will have a total of billion in budget gaps in 2012.

Year-over-year revenues are actually down in Hawaii , Illinois , Indiana, New Mexico and New York . Newly elected New Mexico Governor Susana Martinez learned last week she would confront a million budget shortfall in the coming fiscal year, of which million is from increased costs of Medicaid, the health program for low-income Americans that grows during downturns as people lose their jobs and apply for assistance.

Many states with revenue increases still are confronting huge budget shortfalls that guarantee years of fiscal turmoil.  California may have escalating sales tax receipts, but its budget shortfall will exceed billion for the fiscal year starting July 1. Things will be equally painful in much smaller Nevada, where leaders will have to plug a billion, two-year budget gap. 

Rhode Island tax collections will grow just under 2 percent in fiscal 2012 but the state will still have a million budget deficit. Maryland officials are thrilled that tax receipts are expected to jump million next fiscal year, but that will be eaten up quickly by a .6 billion shortfall. Texas sales tax collections are rising, but the state has an unprecedented billion revenue gap in the next biennium.

The problem is that states lost so much tax revenue during the Great Recession — the Rockefeller Institute pegs the loss at 15 percent since 2008 — that it is taking them a long time to catch up. At the same time, the spending pressures of Medicaid, education, public pensions and corrections are not easing. “It’s like a tornado coming through. You don’t rebuild overnight,” Utah budget director John Nixon told the Deseret News.

States hit bottom in the budget year that ended June 30 but the slow pace of creating jobs has held tax revenue down, especially individual income and sales taxes. Even with a slight increase in tax receipts next year, Mississippi’s projected 2012 tax revenues are 7 percent below pre-recession levels.  “It may technically be a recovery but you don’t have anything on Main Street, Mississippi, that feels like a recovery,” says Mississippi Governor Haley Barbour.

There are some exceptions to the pessimism, though. At least one governor is so confident about the uptick in revenues that he is mulling a tax cut. Arkansas Governor Mike Beebe, who already has worked with lawmakers to slash the sales tax on food from 6 percent to 2 percent, says if the state continues to exceed its revenue forecasts he may propose a deeper cut.

Editor’s note: An earlier version of this story incorrectly reported that Nebraska tax revenue declined between October 2009 and October 2010. Year-over-year revenue has increased in Nebraska, but forecasted revenues for the fiscal year that began July 1 are declining, contributing to a budget shortfall of .4 billion.  The story said 27 states had year-over-year revenue gains; adding Nebraska corrects the total to 28.  

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Stephen Fehr

Stephen Fehr is a senior officer with Pew’s government performance portfolio. He is a lead writer on many of the products generated by the portfolio, specializing in state and local fiscal health.