States' revenues at pre-recession levels: study

WASHINGTON Thu Dec 8, 2011 2:09pm EST

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WASHINGTON (Reuters) - Total tax revenues of U.S. states returned to pre-recession levels in the 2011 third quarter, a public policy institute reported on Thursday, but revenue growth slowed during the period, a worrisome trend for states concerned that economic clouds are gathering as they begin drafting their budgets for next year..

Total tax collections in 48 states rose by 7.3 percent in the July-to-September quarter, the Rockefeller Institute of Government reported.

"After seven quarters of growth, overall state tax revenues have recovered to pre-recession figures," said the institute. "Most states have not yet returned to peak levels, however, because those levels came several months into the Great Recession."

The institute's study did not include data from Hawaii and New Mexico.

States had experienced a slight lag from when the economic recession began in 2007 and when the fall in employment, housing prices and consumption hit their coffers. Their revenues reached record highs at the start of the recession, before plummeting in 2008.

In much the same way, states are only now beginning to register the recession's end, which officially was in June 2009, and are eager for revenues to return to the 2008 peaks.

Despite the growth in revenues in the July-to-September quarter, a period that is the first fiscal quarter for most states, the rate failed to match growth in the second quarter.

"This is a noticeable slowdown from the 10.8 percent year-over-year growth reported in the second quarter of 2011," said the institute.

The European debt crisis, stock market declines, and other economic troubles on the national level have states worried recent revenue improvements will not last. During the recession, their revenues fell sharply for five straight quarters, many to the lowest levels in more than 20 years.

Because all states except Vermont have constitutional mandates to balance their budgets, they responded to falling revenues by hiking taxes and slashing spending, often in emergency sessions. After closing more than $500 billion budget gaps over four years, according to the National Conference of State Legislatures, they have few lifelines left.

Numerous states instituted temporary tax hikes that are now expiring, and large infusions of funds from the federal government under the economic stimulus plan that helped bridge gaps ended last year.

Among the 48 states in Rockefeller's study, only Delaware, Iowa and Missouri failed to show gains in tax revenues during the third quarter. Moreover, 11 states reported double-digit growth in total tax collections.

Personal income taxes, which provide the bulk of revenues for many states, grew 9.2 percent from the same quarter the year before. Sales taxes were up 3.9 percent, in the fourth consecutive quarter of growth.

Illinois, Texas and Alaska had the largest rises in tax collections. In Illinois the gain was mostly fueled by legislated tax increases that took effect in January, and Alaska's strength throughout the recession has rested on oil and mineral prices.

Next month, state legislatures and governors will return to work, and to drafting the budgets for the next fiscal year. A slowdown could complicate their abilities to estimate how much money will be available to spend.

A recent report by the National Governors Association and the National Association of State Budget Officers found that already 17 states are expecting budget gaps for next fiscal year totaling $40 billion.

(Editing by Leslie Adler)

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