State revenues have grown for the third straight year, but don’t go celebrating yet.
By Todd Haggerty
State tax collections continue to climb. According to the U.S. Census Bureau, total state tax collections added up to $846 billion in FY 2013. That’s 6.1 percent more than FY 2012 levels and the third year in a row cumulative state tax collections have grown.
The uptick in tax collections was led by the performance of the personal income tax, which rose 10.3 percent over the previous year. Sales and use tax collections grew by 3.9 percent, a continuation of the modest growth they experienced in FY 2012 when collections rose 3.2 percent.
The corporate income tax was up 7.9 percent in FY 2013, a significant jump from a growth rate of 1.6 percent in FY 2012.
While the continued improvement in state tax collections is an achievement, don’t put on your party hat just yet. It’s been a steady, but slow, climb out of the economic nadir caused by the Great Recession. State revenues are up, but not impressively so. Five years after the longest economic downturn since the Great Depression, 2013 state tax collections are up from 2008 by only 8.5 percent. In comparison, five years after the recession in FY 2002, state tax collection had grown by 42 percent. This spread illustrates just how different the current economic recovery has been from its predecessors.
The change in tax collections from 2008 to 2013 has varied greatly among states—from an increase of 129 percent in North Dakota to a decline of 41.2 percent in Alaska. Energy powered the changes in both—a frenzy of oil development in the Peace Garden State and a drop in oil production in the Last Frontier.
Total tax collections in 42 states met or exceeded 2008 amounts in 2013. Growth rates in 22 of these states outpaced the U.S average of 8.5 percent. This is certainly good news, but it is tempered by the fact that growth rates in 2013 collections for 20 other states were less than the U.S. average. And, for the remaining eight states, 2013 collections were below 2008 figures.
As if the tepid recovery isn’t concerning enough, many of those who watch state revenues closely believe the growth experienced in FY 2013 is not really what it appears to be. The increase in revenue, especially for personal income taxes, was partially a result of taxpayers pushing as much of their income into tax year 2012 as they could to avoid an anticipated increase in federal tax rates in 2013.
This causes uncertainty and lowers expectations when forecasting future revenues. This concern was reflected in FY 2014 revenue forecasts, which were projected at a low 1.3 percent. NCSL’s spring survey of legislative fiscal officers found that only a handful of states are expected to miss their targets by the close of FY 2014, indicating that the modest revenue growth rate projected have largely been attainable.
However, collections during April—an important month for personal income taxes—could determine if many states ultimately meet their revenue goals. Those figures were not yet available when this went to press.
As most states near the FY 2014 finish line, officials will be watching final collections for FY 2014 closely. Improved fiscal conditions in FY 2014, whether modest or strong, are a welcome change from the persistent budget gaps states faced earlier in the decade. And that is cause for celebration.
Todd Haggerty is a policy specialist in the NCSL Fiscal Affairs department.