WASHINGTON (Reuters) - State tax revenues continued to strengthen at the end of 2010, but even with that improvement the long-term outlook for most states "is still ominous," the Rockefeller Institute of Government said in a report released on Tuesday.
"State fiscal recovery will be exceptionally slow and much longer compared to the prior recessions," said the group, which tracks states' finances and economies.
Record revenue declines during the recession, increasing demands for more spending, and unemployment rates that remain nearly double their pre-recession levels mean that full economic recovery for many states will take several years, according to the New York-based group.
The institute's preliminary figures for the final three months of 2010 show that tax collections were up 6.9 percent compared to a year earlier.
It warned the figure was based on preliminary tax revenue data from 41 states. But it said that if final data due in several weeks shows the same strength, the fourth quarter would represent the strongest growth since the middle of 2006.
That date is key because it precedes the recession that began in 2007 and sent states on a downward spiral.
Mass layoffs and the housing bust hit all sources of state revenue and also increased the number of people relying on aid such as unemployment benefits. Because all states except Vermont must end their fiscal years with balanced budgets, they had to cut spending or raise taxes.
STIMULUS FUNDS DWINDLE
Despite the official end of the recession in 2009, states continue to struggle. That has prompted investors in the $2.8 trillion municipal bond market to dump their bonds, economists to warn about a drag on the national recovery, and federal lawmakers to consider the radical step of allowing states to declare bankruptcy.
State governments are especially eager for signs of healthy revenue as the federal government spends the last of its $814 billion economic stimulus plan, which included the largest transfer of federal funds to states in U.S. history.
Looking at final data for the third quarter of 2010, the Rockefeller Institute found state tax revenue grew by 4.5 percent from the same period in 2009. That was the third straight increase and, moreover, 10 states showed double-digit growth.
Both personal income tax and sales tax revenue, the leading sources of income for states, were up 4.3 percent in the third quarter when compared to a year earlier, the report said.
But that rise may not be enough to bring state revenue back to levels attained before the recession.
Sales tax revenue was "hit far harder in the last recession than in previous downturns," according to the report.
Meanwhile, income taxes represent 36 percent of state tax revenue and the drop in employment "in this recession is far worse compared to previous recessions," it added.
One important factor in strengthening revenue is simply the fact that many states have been levying higher taxes.
During the third quarter, tax increases boosted state revenue by about $1.3 billion from the same period in 2009. California's change in its motor fuel tax alone brought in an additional $629 million, the institute said.
Ultimately, the improving revenue indicates recovery will be gradual, the Rockefeller Institute said. States will have to cut more and raise taxes further when they draft their budgets for the next fiscal year, which for most begins in July.
"States will continue to search for ways to climb out of a very deep hole," it said.
(Editing by Eric Walsh)