State tax revenues continue to tank

With the media and the administration pushing the idea that economic recovery has already begun, the Rockefeller Institute for Government looked at one key indicator of economic activity — and discovered something else entirely.  The Obama hailed the initial estimate of 3.5% annualized third-quarter growth of GDP (revised downward twice to 2.2%) as the start of the rebound.  Yet state tax revenues fell by double digits in the same period, the third straight month of double-digit tax declines, and the fourth quarter only looks marginally better (via The New Editor):

Tax collections nationwide declined by 10.9 percent during the third quarter of 2009, the third consecutive quarter during which tax revenues fell by double-digit percentages, according to the latest report from the Rockefeller Institute of Government.

Combining current data with comparable historical figures from the U.S. Census Bureau, the Institute reported that the first three quarters of 2009 marked the largest decline in state tax collections at least since 1963.

Western states saw especially sharp declines in tax collections during the third quarter, while revenues fell by more modest levels in the Southeast, New England, Mid-Atlantic, and Plains regions.

For the fourth quarter of 2009, early data showed continuing declines, although the negative trend of the past year appeared to be moderating. For 38 early-reporting states, personal income taxes fell by 6.5 percent during October and November while sales tax collections declined by 5.5 percent.

This chart shows the difference in tax revenues between state and local collections, the latter of which mainly rely on property taxes rather than income taxes:

The only reason we may be seeing a rebound of sorts in Q4 for this data is because it calculates year-on-year.  The final quarter in 2008 showed a decline, although not particularly sharp, so that 2009Q4 has a lower baseline for comparison.  But for that matter, the tax revenues from the first three quarters of 2008 — which provided the comparative baseline for the three quarters of double-digit declines — also were anemic, at around 1% year-on-year growth.

Also, that “rebound” in Q4 that the RIG anticipates is a smaller decline, not an increase — in other words, a slowing of the rate at which it gets worse, not that revenues will increase.  A Q4 showing anything below the zero line means a decrease from 2008Q4, which already  had declined slightly from the 2007 Q4, which means that a -6.5% will look like an uptick on the chart but will really represent further losses — just at a slower rate.

States rely mainly on income, sales, and property taxes for revenues.  As the above chart shows, property taxes remain fairly stable, although the rate of growth declined over the last three quarters.  The rest of the taxes reflect economic activity in the states, and most of them are seeing deep recessions continue.  When 38 states show drops between 5.5%-6.5% in tax revenues in a quarter, it shows a decline in economic activity.  And when three-quarters of our states are in a recession, attempting to claim economic recovery in any practical sense is sheer folly.

Be sure to read the entire report.

Update: I called the Rockefeller Institute for Government “Rockefeller Center,” which is obviously wrong.  My apologies, and I’ve corrected it above.

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