States Hit by Drop in Tax Collections

Wall Street Journal

By CONOR DOUGHERTY

Tax collections tumbled 11% across 44 states in the third quarter, according to a report that suggests government revenue will remain depressed long after the economy has recovered from recession.

Every major source of state tax revenue — sales, corporate- and personal-income taxes — fell in the third quarter compared with the same period a year ago, according to a report to be released Monday by the Nelson A. Rockefeller Institute of Government at the State University of New York.

The steepest decline was in volatile corporate-income taxes, which fell 19.4% across the 44 states surveyed by the Rockefeller institute. Personal-income taxes fell 11.4%, while sales taxes fell 8.2%. Roughly 80% of states’ total tax collection comes from sales and personal-income taxes.

With tax receipts heavily dependent on wages and spending, state revenues are expected to continue falling for months or years after the technical end of the recession. The economy continued to shed jobs in October, and employment growth is expected to remain muted even as the economy recovers. Many states could be forced to cut spending further.

“State tax revenues will remain fragile and gloomy at least throughout fiscal years 2010 and 2011,” said Lucy Dadayan, a senior policy analyst at the Rockefeller institute.

Each of the 44 states surveyed saw overall taxes decrease in the third quarter from a year earlier, and half saw total taxes fall 10% or more. The hardest-hit region was the Southwest, with third-quarter tax revenue falling 21.5%.

Of the 38 states in the report that collect income taxes, all saw revenue declines, and 21 had double-digit-percentage declines.

The weakness in personal income taxes has for the most part mirrored the recession that began in December 2007. Far Western states, which have been among the hardest hit by falling home prices and the recession, recorded a nation-leading 15.3% decline in personal-income taxes. California, Oregon and Nevada all have unemployment rates greater than 11%, among the highest in the nation.

The report added that despite new taxes and budget cuts in areas including legislators’ salaries and higher-education funding, tax revenue is likely to continue falling short of expenses. Indeed, a report last week from California Legislative Analyst’s Office showed the state is facing a $21 billion budget shortfall, and California’s controller said the state could have trouble making payments as early as next spring.

“Further revenue shortfalls and more spending cuts are mostly likely on the way for many states — particularly those that did not take significant actions to balance revenues and expenditures in their 2010 budgets,” the Rockefeller institute concluded.

Write to Conor Dougherty at conor.dougherty@wsj.com