Last Friday, in Did Retail Sales Rise or Did Tax Rates Go Up?, I stated that retail sales have not risen year-over-year as most people think, rather, collections are up because states have increased sales taxes.
Today, the Rockefeller Institute confirms that analysis in a very detailed report, After Disastrous 2009, States Report Modest Revenue Growth in Early 2010.
- State tax revenues grew by 2.5 percent in the first quarter of 2010, marking the first time that states reported growth in collections on a year-over-year basis since the third quarter of 2008. Thirty-three states reported total tax revenue declines during the first quarter,with five states reporting doubledigit declines.
- The growth in state tax revenues is not an indication of broad state fiscal recovery, but is mostly driven by legislated changes in two states — California and New York.
- State tax revenues are still below the prerecession levels, showing a decline of 9.3 percent in the first quarter of 2010 compared to the same period two years earlier.
(Click on any chart for sharper image.)
The local tax slowdown is less severe than the state tax slowdown. In the first quarter of 2010, local tax collections showed a decline of 1.1 percent. Most local governments rely heavily on property taxes, which tend to be relatively stable. However, collections from local property tax declined by 1.1 percent during the quarter, marking the first time that local governments report decline in property taxes since the start of the recession. Collections from local sales tax continued to decline in the first quarter of 2010 at 0.5 percent, while collections from local individual income taxes showed a growth of 5.1 percent after five consecutive quarter declines.
Only eight states reported growth in personal income tax collections. Thirty-five states showed declines in the first quarter of 2010, with 15 states reporting double-digit declines. Michigan and Louisiana reported large declines in personal income tax collections at 61.5 and 54.2 percent, respectively. The largest increases in terms of dollar value were reported in California and New York where personal income tax collections grew by $2.0 billion and $2.1 billion, respectively. Again, if we exclude California and New York, the national picture changes significantly — personal income tax collections for the first quarter show an 8.4 percent decline in the first quarter of 2010 compared to the same quarter a year earlier.
Thirty-three of 45 states with broad-based sales taxes had declines, and four states had double-digit declines. Wyoming led the states with the largest decline at 44.5 percent, followed by Louisiana at 19.2 percent. Preliminary figures for the 37 of 45 early reporting states with broad-based sales tax indicate that sales tax collections saw some positive growth at 6.0 percent in April-May 2010 compared to the same period of 2009.
While June data could change the picture, sales tax growth in the April-June quarter is not unexpected, as a result of stabilizing retail sales and consumption as well as legislated changes in several states.
The recent decline in consumption of durable and nondurable goods was much sharper than in the last recession. While consumption of durable goods and services has been slowly recovering, growth levels are still below those of the prerecession period. The consumption of durable goods was surprisingly strong and saw steady growth in the last few months.
Tax Law Changes Affecting This Quarter
During the January-March 2010 quarter, enacted tax changes increased state revenue by an estimated net of $4.9 billion compared to the same period in 2009. Personal income tax increases accounted for approximately $2.7 billion and sales tax for approximately $1.7 billion of the change.
In a single state, California,legislated changes increased personal income tax and sales tax collections each by an estimated $1.1 billion. Legislated changes in New York were also significant for the personal income tax. Most of the increase in sales tax was due to legislated changes in California, Massachusetts, and North Carolina.
Although state tax revenues show some growth in the first quarter of 2010, the growth is very negligible and is mostly attributable to enacted tax increases and tax processing changes.
While the revenue strength of the final quarter of fiscal 2010 for the 46 states is still being determined, the outlook is certainly not promising, particularly for income tax collections.
According to NASBO, state general fund spending already saw negative growth both in fiscal 2009 and 2010. “This two year decline is unprecedented and is only the second time that state general fund spending has declined in the history of the Fiscal Survey,” which dates back to 1979.
With preliminary data for April and May now available for 42 states, tax revenue for the two months combined increased by 0.9 percent versus the same period last year, mostly due to increases in sales tax collections. About 60 percent of states reporting personal income tax data had a year-over-year decline, with a median decline of 0.4 percent, while about 84 percent of states reporting sales-tax data had a year-over-year increase of 6.0 percent. While June data could change this troubling picture, there is little reason to expect reported revenues for that month to be strong.
This was a very detailed report with 10 charts. I only displayed 4 of them, so inquiring minds will want to give the article a closer look.
Improvements in revenue collection are mostly if not entirely due to tax increases and other legislative changes such as California speeding up income tax collection rather than an increase in retail sales as widely touted.
Looking ahead, consumer attitudes towards debt are going to act as a huge drag on growth. State budget cuts are going to act as a drag on retail spending as well. Finally, the effect of $trillions in stimulus money will be over by the 4th quarter.
The key chart in the series is chart 7, on durable goods. Note the huge dip and subsequent rally in durable goods spending. That component will be all but dead in the upcoming quarters.
New home sales have once again crashed with the expiration of tax credits. Those credits have been extended again (but only for sales already in the mix). With a crash in home sales, durable goods orders for appliances will also crash.
Moreover, and as noted in Consumption Inflection Point - No One Wants Credit, consumer spending plans have plunged.
The above chart courtesy of and by permission of Contrary Investor.
So while state revenues have finally stabilized, that is likely as good as it is going to get barring more tax hikes and revenue enhancement measures.