Gas price hikes threaten states' recovery

CHICAGO Thu Apr 14, 2011 3:28pm EDT

An employee holds a gas pump to refill a car at a petrol station in central Seoul April 6, 2011. REUTERS/Lee Jae-Won

An employee holds a gas pump to refill a car at a petrol station in central Seoul April 6, 2011.

Credit: Reuters/Lee Jae-Won

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CHICAGO (Reuters) - A sharp rise in gasoline prices threatens to derail a much-needed recovery in U.S. state revenue.

The jump in gasoline prices fueled by political unrest in some oil-producing countries, as well as factors that could roil markets such as sovereign debt problems and Japan's nuclear crisis, may weaken the economy, slowing state income and sales tax collections.

A stream of recent economic data has also pointed to consumers spending less on almost everything. Experts have estimated that a $10-a-barrel increase in oil prices means a 25-cents-a-gallon increase in gasoline prices which could translate into a decline of 0.2 percent in gross domestic product.

According to a Reuters/Ipsos poll, higher gasoline prices have damaged confidence in the country's future and made some Americans change their spending habits and lifestyles.

A sampling of state revenue data for the first three quarters of fiscal 2011, which began on July 1 for most states, shows healthy growth levels.

"Tax revenue is beginning to recover, no doubt about that," said Don Boyd, a senior fellow at the Rockefeller Institute of Government, which tracks state revenue.

But even with the current growth spurt, state revenue is still 10 percent below pre-recession levels, Boyd added.

ALARM RAISED OVER GASOLINE PRICES

Maryland's Board of Revenue Estimates last month sounded the alarm on higher gasoline prices.

"If prices remain at this heightened level for several months, sales tax collections are likely to be adversely affected as consumer spending is redirected from taxable goods to gasoline," the board said in a letter to Governor Martin O'Malley.

The board added that if prices go even higher it could stall the national economic recovery.

U.S. retail gasoline prices are averaging $3.79 per gallon in the latest week, up 10.7 cents from the prior week and up 93.3 cents from a year ago, according to the U.S. Energy Department.

For Oklahoma, the higher prices are a "double-edged sword," said State Treasurer Ken Miller. Revenue from the energy producing state's gross production tax on oil and gas jumped 43.6 percent to nearly $106 million in March versus February.

"When energy does well, our state does well," Miller said, adding however that higher gasoline prices could stymie the state's sales tax collections and hurt Oklahoma's slow but steady economic recovery.

The so-called Great Recession, which began in December 2007 and ended in June 2009, sent revenue for most states into a downward spiral. Money from the $821 billion federal stimulus program allowed states to prop up their budgets amid the revenue collapse, but that fund flow has largely ended.

At the same time, states are grappling with huge unfunded pension liabilities and employee health care costs that are weighing down their budgets.

Investors in the $2.9 trillion municipal bond market, spooked by the budget crisis, have been pulling their money out of muni mutual funds for five months and are eager for reassuring signs that state revenue is recovering.

Meanwhile, most states must enact new budgets in less than three months, and any stalling in revenue growth will force them once again to slash spending or raise taxes, something political leaders are loath to do.

A survey by the National Governors Association of governors' state of the state speeches that kicked off current legislative sessions found the word "tax" was mentioned more than 688 times in the addresses, with most governors pledging not to raise taxes, and occasionally even to cut them.

Illinois' general fund revenue is running 12.4 percent higher than the same period in fiscal 2010, but that is largely due to action in January that boosted the personal income tax rate by 67 percent and the corporate tax rate by 46 percent.

California's revenue is up 7.8 percent so far in fiscal 2011, but March collections were 5.4 percent lower than in March 2010 and 5.8 percent below the estimate in Governor Jerry Brown's budget plan.

"This volatility in revenues, with some sources posting solid increases while others lag behind, is indicative of how bumpy the road to recovery will be," said a report last week from State Controller John Chiang's office.

(Additional reporting by Lisa Lambert in Washington and Jim Christie in San Francisco; Editing by James Dalgleish)

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