Weak sales tax revenue seen trouble for states

By Dean Patterson

WASHINGTON (Reuters) - Weakening sales tax collections may foreshadow a potential downturn in U.S. state budgets, which have been riding high in recent years on a strong economy and generally robust tax receipts, a report said on Thursday.

"Sales and use tax collections are less robust and are generating concern in some states," the National Conference of State Legislatures said in its periodic assessment of state fiscal health.

The report is based on a survey of legislative fiscal directors in March regarding the first eight months of most states' current fiscal year that ends June 30.

The report adds to other recent data that suggests the sustained period of improvement in state budgets may be near an end. Credit quality has improved among state and local governments in recent years. States have used this period to cut taxes and build their cash reserves.

Relatively restrained spending in recent years has also helped state budgets strengthen, the report said.

"State budgets continue to be strong as states approach the end of fiscal year 2007," the report said. "Overall revenue performance continues to be stronger than anticipated in most states, although growth rates appear to be moderating."

Sales and use taxes have shown the most weakness. Fourteen states reported weaker-than-expected collections, 16 said they were about on track and 11 said receipts were higher than anticipated.

Forty-five states levy a statewide sales tax.

"Only Louisiana noted that collections are very strong, which results from the rebuilding after two major hurricanes," the report said. Florida, New Jersey and Pennsylvania reported weakness.

NEARING A PLATEAU

The National Conference of State Legislatures' report is consistent with other recent assessments of where states are heading financially.

States are closely watched by Wall Street as a bellwether for the economy because they are so reliant on personal income and sales tax collections.

Last week, The Liscio Report said states recorded a second straight month of weak sales tax receipts in March, suggesting weakness in the broader economy.

"So while we're probably not at the leading edge of a recession, consumers are sounding pretty pinched," the proprietary report said. New York-based research firm Liscio collects and analyzes state sales tax data for paid subscribers.

The figures were dramatic but are volatile by nature. Only 18 percent of states surveyed met or exceeded their sales tax projections last month, the report said. About a third of those surveyed said sales tax receipts were down from a year ago, some "quite steeply," the report added.