U.S. News

States' revenues fall in Q4; Q1 looks worse: study

CHICAGO (Reuters) - Revenue of U.S. states fell 4 percent in the 2008 fourth quarter as sales tax collections had their biggest drop in 50 years, and 41 states were on track for revenue declines of more than triple that rate for the first quarter of 2009, according to a report released on Tuesday.

States, which have been struggling with lower revenue as the recession hits everything from sales taxes to property taxes, are likely to suffer more this month with an expected sharp fall in income taxes, according to the report by the Rockefeller Institute of Government.

Total tax revenue declined in 35 states, while six saw double-digit declines, according to the institute, which is the public policy research arm of the State University of New York.

Initial data for the first quarter of 2009 showed 41 states reporting that overall tax collections were down 12.8 percent in January and February versus the same two months in 2008, the report said.

“Preliminary data for the January-March quarter suggests that fiscal conditions deteriorated even further, and the second major tax source for states -- the income tax -- is likely to weaken dramatically in April,” said Donald J. Boyd, senior fellow at the Rockefeller Institute and co-author of the study, in a statement.

Sales tax collections, a major revenue generator for states, fell by 6.1 percent in the fourth quarter of 2008 from the year-earlier period. The decline was wide-spread, hitting 34 out of the 45 states with broad-based sales taxes, according to the report.

“While income growth has slowed, the big story so far is that consumption of goods, especially durables, has been declining,” Boyd said. “This is a classic response of consumers to economic uncertainty and fears of lower income: eliminating, postponing, and scaling back purchases of items that are not necessary or not needed immediately, such as new cars, washing machines, and so on.”

States in the far west region, which includes California, had the biggest overall tax revenue decline in the last quarter of 2008, followed by Great Lakes States, according to the institute. Collections in the Plains States had the best performance, coming in flat for the quarter.

Reporting by Karen Pierog; Editing by Leslie Adler