(Reuters) - Revenues in most U.S. states increased in the fourth quarter of 2011, but their recent surge is tapering off, as they grew just 2.7 percent from the final quarter of 2010, according to a report released on Monday.
“This is a noticeable slowdown from the 11.1 (percent) and 6.1 percent year-over-year growth reported in the second and third quarters of 2011, respectively,” the Rockefeller Institute, a think tank that closely watches states’ revenues, said in the report.
The growth rate in last year’s fourth quarter was the lowest since the second quarter of 2010.
Altogether, revenue rose in 41 states and dropped in nine, according to the Rockefeller Institute’s report.
The largest decline was in California, where fourth-quarter revenue dropped 8.9 percent from the year-ago quarter, followed by Louisiana, where the revenue drop was 5.1 percent for the 2011 final quarter on a year-over-year basis, the Rockefeller report said.
Illinois recorded the largest gain in fourth-quarter revenue of 24.1 percent year-over-year, followed by Connecticut, with a 21.9 percent increase, the report found.
Altogether, eight states recorded double-digit percentage gains in revenue.
California and Illinois made legislative changes that had large impacts on their incomes - dragging down revenues in California, while pumping them up in Illinois last quarter. Without those two states, total growth was a bit stronger, 4.4 percent, Rockefeller said.
Even that higher rate, though, is the slowest since the third quarter of 2010, according to the report.
Total corporate income-tax collections were off 3.8 percent, balanced by a 3.5 percent increase in personal income-tax revenues and a 1.8 percent rise in sales-tax revenues. Still, personal-income tax collections were much weaker than in the previous quarter, when they were up 10.1 percent.
Revenue has now increased in U.S. states for eight straight quarters, which should bring some encouraging news. The recession spared just a few states from collapsing revenue and steep spending cuts, but the recovery that officially began in mid-2009 has been far more uneven.
Most states have four months until their next fiscal years begin. And many legislatures and governors are in the thick of budget negotiations. All states except Vermont must end their fiscal years with balanced budgets, and they will have to cut spending and hike taxes further if their revenue projections are off.
So far, for fiscal 2013, 29 states are closing or have closed budget gaps of $47 billion, according to another group that watches states’ fiscal health, the Center on Budget and Policy Priorities.
That is less than half the size of the shortfalls they had to wipe out for the current fiscal year. Still, the total gap could drag on the national economy, the think tank said in a report last week.
As revenue slows, “states’ education and healthcare obligations continue to grow,” the Center on Budget and Policy Priorities found.
“Next year, states expect to educate 350,000 more K-12 students and 1.7 million more public college and university students in the upcoming school year than in 2007-08,” it said.
“And some 5.6 million more people are projected to be eligible for subsidized health insurance through Medicaid in 2012 than were enrolled in 2008, as employers have cancelled their coverage and people have lost jobs and wages.”
During the revenue crisis, states “made deeper cuts to education spending and local government aid than in prior downturns,” Kimberly Lyons, assistant vice president in the public finance group at Moody’s Investors Service, said in a note on Monday.
She pointed to Florida, which has already enacted its fiscal 2013 budget, as a state that has “made significant cuts in funding to state colleges,” while North Carolina cut $2.6 billion of education spending for fiscal 2012 and 2013.
“Although we expect that projected state budget gaps will continue to moderate, states still face risks such as sluggish economic growth and expenditure pressures from Medicaid and pensions,” she wrote.
Reporting by Lisa Lambert; Editing by Jan Paschal