Slow and steady: Q1 state revenue rises just 4.5 percent

Tue Jun 26, 2012 4:37pm EDT

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(Reuters) - U.S. state tax revenue rose only 4.5 percent in the first quarter of the year from the same period in 2011, the U.S. Census reported on Tuesday, marking the 10th straight quarter of growth as well as a slowdown in many states' recent recoveries.

In the first quarter of 2011, revenue increased by double that rate, rising slightly more than 10 percent from the first quarter of 2010. According to the Rockefeller Institute of Government, revenue growth has softened for nearly a year after collections climbed 11.1 percent in the second quarter of 2011.

As most states prepare to begin fiscal 2013 next week, they are keeping a wary eye on revenue data. The housing downturn, financial crisis and recession combined to ravage their revenue, which plummeted 12.2 percent in the first quarter of 2009. Because all states except Vermont must end their fiscal years with balanced budgets, they slashed spending and increased taxes, while also turning to the federal government for help.

Now the extraordinary federal aid from the 2009 economic stimulus plan is over and citizens show little appetite for extending emergency tax increases, leaving states more reliant on existing revenue sources.

Their biggest source, individual income taxes, rose 5.1 percent in the first quarter of 2011 from the same period in 2010 to $62.3 billion, according to the Census. The second largest source, sales tax revenue, was up 4.3 percent to $60.3 billion.

Meanwhile, corporate income tax collections dragged on the growth, dropping 0.3 percent to $9.4 billion. Corporate tax revenue had leapt 9 percent in the first quarter of 2011 from the same quarter in 2010.

The 2007-09 recession was fairly uniform, sparing all but a few states from a revenue collapse. The recovery, though, has been uneven. States that are rich in commodities, especially those with abundant agriculture or natural gas sectors, have bounced back more quickly than those that prospered during the housing bubble.

For example, severance taxes make up 59.6 percent of revenues for North Dakota, which was largely unscathed by the downturn, according to the Census.

Meanwhile, the federal government looms large as a threat to state finances, as it attempts to reduce its deficit through spending cuts that trickle down to states. And the financial turmoil in Europe could add more uncertainty to state budgets.

For almost all states, the new fiscal year starts July 1. A recent survey by the National Association of State Budget Officers and the National Governors Association found that governors expect revenue to rise 4.1 percent in fiscal 2013, but they are budgeting for spending to increase only 2.2 percent as they remain cautious about the recovery.

PROPERTY TAXES DRAG ON LOCAL GOVERNMENT RECOVERIES

"State and local finances are improving as the private sector continues its slow recovery and tax receipts increase. However, state and local governments are not out of the woods yet," said Gregory Daco, principal U.S. economist at IHS Global Insight, in a research note on the Census data. "What does this mean for many state and local governments? Tight budgets."

State and local government revenue combined grew a much more meager 1.5 percent in the first quarter of 2012 from the same quarter in 2011, totaling $325.3 billion, according to the Census report.

According to Daco, the combined total is 6.3 percent above the peak revenue reached in 2008. He noted, though, that when property taxes are excluded from the calculations, revenue remains 0.3 percent below the 2008 peaks.

Local governments rely heavily on property taxes - collecting $110.7 billion out of the total $114.6 billion in the first quarter - and will likely feel more pain from the dip of 0.9 percent in property revenue that the Census reported.

Over the last year, states have pulled back on aid for cities and counties in order to cut their own spending. Now, local governments are more vulnerable to the caprices of the housing market, where property values for calculating taxes remain low.

(Reporting By Lisa Lambert; editing by Gunna Dickson)

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