States’ tax revenue rose 8.9 percent in last fiscal year

The severe fiscal problems that crippled state budgets and sparked brutal political battles in the wake of the recession are easing, as state tax revenue rose substantially last year, the Census Bureau reported Thursday.

State tax collections were up 8.9 percent in the fiscal year that in most states ended last June. The improvement spanned the country, with all 50 states reporting an increase in tax collections — something just 11 states experienced during the previous fiscal year.

The fiscal crisis faced by states had been the source of immense political battles across the country as governors and legislators took unprecedented steps to balance budgets and get a handle on ballooning debt.

California, Florida and New York were among the states that slashed education and other aid to local governments. Others moved to rein in public employees’ pay and retirement benefits. And in Ohio and Wisconsin, Republican governors drew national attention by curtailing the collective bargaining rights of public workers.

Those efforts fueled an immediate backlash that has reshaped the political landscape in potential swing states seen as crucial to the presidential election. In Ohio, voters restored collective bargaining in a November vote, while Wisconsin Gov. Scott Walker (R) faces a recall election in June, the third governor in U.S. history to do so.

After all that, the fiscal picture is showing steady signs of improvement. Several states, including Minnesota, where a dramatic budget standoff caused a government shutdown last summer, are projecting small budget surpluses. Meanwhile, tax revenue continues its steady improvement across the country.

While revenue remains below pre-recession levels, nine states saw tax revenue increases of 10 percent or more in 2011, a marked improvement over the previous fiscal year, when no state saw tax receipts grow by more than 10 percent and five endured decreases at least that large. In Maryland, overall tax revenue was up 5.1 percent, and in Virginia it rose 6.1 percent. Census officials said data for the District will be available later this spring.

Analysts called the report confirmation of the continuing revenue improvement evident in other reports. At the same time, they warned, because of rising expenses and reductions in federal and other revenue, state budgets remain troubled.

“Despite the growth in tax collections in 2011, states have a long way to go for a full fiscal recovery,” said Lucy Dadayan, a senior policy analyst with the Rockefeller Institute of Government. “Yes, fiscal 2011 tax revenue numbers are encouraging as they report strong growth relative to 2010. However, the collections remain below the peak levels. And states will continue searching for ways to balance the gap between revenues and spending.”

In addition, Dadayan and other analysts noted, revenue growth for states appears to be slowing in the first part of the current fiscal year, underscoring their prediction that it will be a long time before state budgets return to their pre-recession health.

“Adjusted for inflation, state revenues are 6 or 7 percent below where they were before the recession hit,” said Michael Leachman, director of state fiscal research for the Center on Budget and Policy Priorities. “Even if we continue to see the strong revenue growth we saw last year, it would be several years before states are fully recovered.”

Although their tax revenue has improved substantially since the worst of the recession, states continue to face severe fiscal challenges as they are called on to spend more because of the economic stress caused largely by continued high unemployment.

Many states face increasing caseloads for Medicaid, the combined federal-state health program for the poor and disabled. Some have unemployment insurance funds that are deep in the red. Meanwhile, they are all trying to juggle declining federal help and increasing demands from cash-strapped local governments, many of which have had to absorb cuts in state aid in recent years.

The new report found that tax revenue was up in nearly all categories, which the census called a sign of an improving economy.

“The nationwide increases in state government tax revenue are an indication of the stabilization of revenues for state governments,” Lisa Blumerman, chief of the Governments Division at the U.S. Census Bureau, said in a statement.

Severance taxes — the money that states collect for the harvesting and extraction of natural resources such as timber, oil and natural gas — were up 31.2 percent nationwide, following a sharp decline in 2010. Sales tax collection rose 8.3 percent in 2011, ending two consecutive years of decreases.

Individual income tax revenue, which counts for a third of overall state tax collections, increased 9.8 percent, following decreases in the past two years. Property tax revenue was among the few categories that declined in 2011, falling by 2.3 percent last year, the report said.

Michael A. Fletcher is a national economics correspondent, writing about unemployment, state and municipal debt, the evolving job market and the auto industry.
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