State Revenues Continue to Surprise Positively - and It's Still Not Enough

by: Hale Stewart

Most state budgetary years run from June 30 to June 30, so we are rapidly approaching the moment of truth where we find out how badly states are harmed by the ending of federal assistance. Two months ago when I last looked at this issue, we only had data through the end of last year. It appeared that state budgetary problems, while bad, would not be quite as bad as originally feared. Now we have the final data through last December, preliminary data for the first quarter of this year, and at least some raw information about April. So let's revisit the situation.

The Rockefeller Institute released its quarterly report one month ago, saying:

State tax revenues grew by 7.8 percent in the fourth quarter of 2010, compared to the fourth quarter of 2009, according to Rockefeller Institute research and Census Bureau data. This is the fourth consecutive quarter that states reported growth in collections on a year-over-year basis. Forty-two states reported tax revenue growth during the fourth quarter, with nine showing double-digit growth.
Preliminary figures for January and February 2011 indicate further strength in state tax revenues this year. Overall collections in 45 early-reporting states showed growth of 9.5 percent compared to the same months of 2010, and 7.5 percent compared to the same months of 2009.

Based on the seasonally and inflation adjusted chart of real state revenues I prepared for my last article, which showed the first calendar quarter of last year 12.6% off the peak, and two years ago 12.8% off the peak, the January - March quarter of this year was around 3.1% to 5.3% below state revenues' April - June 2008 peak.

Newspaper articles from the last month strongly suggest that the positive surprise in revenue growth continues.

For example, in Kentucky,

The office of the state budget director reported ... that April's General Fund tax revenue grew by nearly 8 percent compared to year ago figures. That means total revenues for the month were $844 million - compared to $782 million in April 2010. Tax receipts have grown 5.6 percent for the first 10 months of the current fiscal year.
....
Road Fund tax revenues for April were $116 million, a 7.6 percent increase over April 2010 figures. Year-to-date tax receipts for fiscal year 2011 have increased by nearly 12 percent over last year.

“We are seeing improvement in the major taxes," Lassiter said. "The most recent interim outlook predicts collections to exceed the official estimate by approximately $95.7 million

In California,

State officials are reporting an unexpected $2-billion surge in tax receipts that will help lawmakers close the remaining $15-billion budget deficit, and the Capitol is humming with hope that more is coming.

In Massachusetts.

The Commonwealth of Massachusetts hauled in April tax receipts that were $580 million above expected estimates, according to a Massachusetts Department of Revenue announcement today.
....
Collections for April 2011 totaled $2.505 billion, up 43.4 percent from the same period last year.

In New Jersey,

David J. Rosen, chief budget officer for the nonpartisan Office of Legislative Services (OLS), told the Assembly Budget Committee yesterday morning that state tax revenues would be $913 million higher than Gov. Chris Christie anticipated in his March budget message. The surplus, he explained, comes courtesy of a huge two-year surge in income tax revenues, which would more than make up for a decline in corporate tax revenues in fiscal years 2011 and 2012.

In Nebraska,

economic forecasters on Thursday said they see improvements in the state's economy.
And they made their optimism official, projecting an increase in the overall amount of revenue the state will bring in the rest of this year and in the 2011-13 budget years.

Some of the board's positive outlook came from what the state Department of Revenue said it has seen since April 18 in individual income tax growth.

But there are other defining factors that the six members of the Nebraska Economic Forecasting Advisory Board considered in projecting an $82.5 million increase in revenue for this fiscal year, and a $146.5 million net gain to the state's bottom line in the two years after.

Even in Texas,

Lawmakers will have an additional $1.2 billion to spend during the next two years, Comptroller Susan Combs told state leaders Tuesday.
The revised revenue estimate will ease pressure on legislators working to craft a budget compromise before the session adjourns May 30. But it’s not nearly enough to eliminate dramatic cuts and layoffs across all levels of state government caused by a revenue shortfall that was initially projected to be $15 billion — or $27 billion when calculating the costs of maintaining services for a growing population.

Most of the higher revenue estimate comes from a dramatic rise in sales tax receipts during the past year. The high price of oil also has helped fill the state coffers.

Rather than simply parrot secondhand accounts, here is a chart of how April 2011 general fund revenues compared with one year ago and the peak three years ago for eight specific states I began following in 2009:

State Revenue April 2011 Revenue April 2010 % Difference Revenue April 2008 % Difference
New York 6,948.4 5,341.6 +30.1% 8,782.2 -20.9%
Indiana 1,673.3 1,684.7 -0.4% 1,961.4 -14.7%
Tennessee 1,264.2 1,243.0 +1.7% 1391.9 -9.2%
Alabama 827.6 682.0 +21.3% 840.7 -1.6%
Georgia 1,371.7 1,340.5 +2.3% 1,761.2 -22.1%
California 10,355.8 10,100.4 +2.5% 16,231.9 -36.2%
Florida 2,612.2 2,516.6 +3.7% 2,358.5 +10.8%
Ohio 2,342.9* 1,988.2* +17.8% not available n/a
Click to enlarge

[*Unlike the other states, Ohio includes federal budget assistance in revenues statements. For purposes of consistency, these have been subtracted.]

The bottom line: state tax revenues continue to surprise to the upside. But it still won't be enough to avoid some real financial spending crises in a few particularly hard-hit states such as California, and New York, where steep declines in personal income tax collections are responsible for almost the entire shortfall compared with 2008. In Florida, the gain over 2008 is no error - it has no personal income tax.