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The good, bad and ugly of the state revenue recovery

Stacks of $100 bills. Cash money. (Credit: Ieva Geneviciene.)

CORRECTION: This post previously incorrectly identified the units of time measured in the charts below. Each measures the number of quarters since the given recession began. 

The acceleration of the state revenue recovery may be over as quickly as it began.

The end of 2012 and the first half of this year were looking good for states’ coffers. Tax collections in the fiscal year that ended in June beat their 2008 peak by 0.7 percent, after inflation adjustments — a positive sign for states clawing their way out of their fiscal downturn. But some 28 states still had lower revenues at the end of fiscal 2013 compared to fiscal 2008, and it looks like things are starting to slow again.

“[P]reliminary figures for the third quarter of 2013 indicate that in many states strong revenue growth is not sustaining the momentum and states are reporting significantly softening revenue growth,” the Nelson A. Rockefeller Institute of Government found in a new report. It’s not that revenue will contract, it’s just not looking like it will grow as quickly as it has been.

The revenue decline was deeper and longer than previous downturns, and the recovery was slower, too. It took about 21 quarters for state tax revenues to recover since the start of the recession (see the red line below). Compare that to the roughly 13 quarters it took after the 2001 recession began (blue line). State revenues barely needed to recover ground in the 1990 recession.

And momentum has been fading. Total tax collections in the second quarter of the year were up 9 percent from a year prior, according to the Rockefeller Institute. In the third quarter, they were up just 6.1 percent. In other words, growth was roughly a third slower in the third than the second quarter.

The slowdown in the revenue recovery can be partially explained by the three charts — good, bad and ugly — below.

The good: Personal income taxes saw a one-time boost

Much of the growth in personal income tax revenue in the 2013 fiscal year — the one that ended on June 30 — came about for two reasons. First, some states, including California, Illinois and New York, increased their income taxes. And, second, there was a boost in personal income tax collections at the end of 2012. Why? It has to do with the “fiscal cliff” showdown at the end of the year. Had Congress done nothing — which seemed very possible — taxes would have risen on several types of income. Since no one knew what would happen, and Congress didn’t reach a deal until the 11th hour, many people shuffled their income around to avoid being hit by the potential tax hike.

Despite the boost at the end of 2012, personal income tax collections in the second quarter of the year were still 1 percent below their recession peak in the second quarter of 2008, after inflation adjustments. But, overall, personal income tax collections are now 6.1 percent above where they started when the Great Recession began.

The bad: Sales taxes are weak

After inflation adjustments, revenue from sales taxes is still 3.4 percent where they were when the Great Recession began. although they’re clearly rising from a low point about eight quarters in.

The ugly: There’s no corporate income tax recovery

Corporate income tax revenues reached similarly low points after both the 2007 (red) and 2001 (blue) recessions, but where they stand this far after the given recession is worlds apart. By this many quarters into the 2001 recession, corporate income tax revenues were about 30 percent above where they started when the recession began. Today, they are about 17.5 percent below their starting point — a 45 percentage point gap between both recessions.

(Credit: The Nelson A. Rockefeller Institute of Government)


Niraj Chokshi is a general assignment reporter for The Washington Post.

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