Economic Good News: States’ Tax Revenue Rises
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The Fiscal Times
November 7, 2011

  • State revenues are up 10.8 percent from a year ago
  • Budget gaps, totaling $91 billion this year, are expected to shrink
  • State rainy-day reserves have risen to 5-6 percent of overall spending

The Great Recession drove state budgets into a long dark tunnel. Now, after four years of painful measures to close some $500 billion in budget shortfalls, state legislatures are starting to see a glimmer of light. Revenues are picking up smartly and broadly, while the biggest and most painful spending cuts are already on the books. Many states remain far from a full recovery, but unless the U.S. economy slides back into recession, state finances finally appear to be headed in the right direction.

Stronger revenues are driving the turnaround. Receipts in nearly all states are now either stabilizing or improving. Tax revenues in the second quarter rose by a strong 10.8 percent from a year ago, and receipts have nearly returned to the peak level reached four years ago, according to data from the Rockefeller Institute and the Census Bureau. Rockefeller analysts say every state but New Hampshire reported revenue increases for the quarter, and preliminary data for the third quarter show continued gains. The figures reflect tax receipts in the final quarter of fiscal year 2011, which ended on June 30 for 46 states, and the rise in revenues during the entire fiscal year was the strongest since 2005.

The economy might even provide a bit more help in FY 2012, which began on July 1, than it did in FY 2011. Economic growth in the third quarter picked up to a 2.5 percent annual rate after averaging only 0.9 percent in the first half, and economists have raised their fourth-quarter forecasts. Job growth in recent months also looks firmer than it did in the spring.

Recent revenue gains are impressive, given that
for the first time in 10 years states overall enacted
more tax cuts than tax hikes.

October payrolls grew by a tepid 80,000 and the jobless rate dipped to 9 percent from 9.1 percent in September. However, upward revisions to August and September payrolls mean that private-sector job gains have picked up notably. More jobs will boost revenues from income and sales taxes, which account for two-thirds of state receipts.

Recent revenue gains are impressive, given that for the first time in 10 years states overall enacted more tax cuts than tax hikes, by a net $2.5 billion, according to the National Conference of State Legislatures. That balance mainly reflected the expiration of temporary tax hikes in several states. The NCSL also noted that yea-end balances, or rainy-day reserves, which the NCSL says is a key measure of state fiscal health, are edging higher into the 5-to-6 percent range as a share of overall spending. That’s still below pre-recession levels but above the low point in FY 2009.

Because 49 states have laws requiring a balanced budget, states are still working through the sharp cutbacks in spending and services that were necessary to close the $91 billion gap between receipts and outlays they faced heading into FY 2012. Despite the pickup in revenues, outlays for mandated programs, especially Medicaid, continue to grow rapidly, even as states are in the middle of steep cuts to education budgets, and future Washington policy remains a big unknown. “States are reporting more optimistic and positive news,” said NCSL executive director William Pound commenting on the NCSL’s State Budget Update, “but they are not out of the woods yet.”

James C. Cooper
was BusinessWeek's senior editor, senior economist and author of its influential Business Outlook column. Prior to that, he was an economist at the American Paper Institute, performing economic analysis and forecasting. He holds bachelors and masters degrees in economics.