State financial data released today by the Census Bureau shows governments collected $757 billion in fiscal year 2011, up nearly $56 billion from the previous year. Despite sizeable gains in some states, though, overall growth remained slow and below pre-recession levels.
Tax analysts cautioned that revenues have not rebounded, and expect a slow economic recovery to continue to drain state coffers. Going forward, governments will likely see sluggish growth in tax revenues, they said.
“We’re over the worst of it, but I still think the road will be a little rocky going forward for some states,” said Kim Rueben, a senior fellow at the Urban Institute.
Total state tax collections increased the past two years. But that’s only because revenues dropped sharply during the recession. Fiscal year 2011 collections are down 2.1 percent from peak levels in 2008, without adjusting for inflation.
Eleven states reported double-digit percentage increases last year.
North Dakota’s total tax collections shot up 44 percent, by far the largest increase of any state. A shale oil boom fueled much of the added $1.2 billion in revenue, with the state recently overtaking California as the country’s third-largest oil producer.
Oil and natural gas industries boosted revenues in other states as well. Alaska, Illinois and New Mexico recorded the next highest year-over-year percentage gains.
California was also among states with the largest yearly increase, with tax revenues up 11 percent from 2010. Rueben said higher income tax collections accounted for much of California’s growth, likely aided by capital gains taxes.
Individual income taxes make up a third of total state revenues and rose nearly 10 percent for the year. Rueben said uncertainty over capital gains and dividend rates near the end of 2010 boosted these figures as many individuals sold their investments.
Some states recorded relatively small revenue gains for the year. Shifting tax policies can sway total collection rates. Varying economic cycles also influence annual totals.
Hawaii reported less than a 1 percent increase in year-over-year tax collections, the smallest in the country. Rueben said she suspects a decline in tourism may have hurt the state.
Louisiana’s state revenue took a hit from the Gulf oil spill, with collections up only 1.2 percent from fiscal year 2010.
For the current fiscal year, policy analysts expect any state revenue spikes to be minimal.
"We’re on the road to recovery for states, but I would urge caution rather than assuming there is a lot of wiggle room to start cutting taxes,” Rueben said.
North Carolina and Connecticut are among several states that have allowed temporary tax increases to expire. In California, Gov. Jerry Brown has proposed a special election to decide whether to extend tax hikes later this year.
Oklahoma, Missouri and Kansas are debating plans to completely drop state income taxes. With local governments struggling, Rueben said such moves would be a mistake.
“If states don’t restore some of the aid they cut, it’s going to be much more difficult for local governments to sort this out,” she said.
Lucy Dadayan, senior policy analyst for the Nelson A. Rockefeller Institute of Government, also expects slow revenue growth for states in the coming years.
“There will be more pressure to find solutions to close the gap between revenues and spending,” she said. “States have to take measures to control the growing Medicaid and pensions pressures.”
Local governments -- relying mostly on property taxes -- could find the next few years particularly difficult. Property taxes, although hit by the poor housing market, typically lag a few years behind income taxes and other revenues. Census figures show declining property tax revenues over the past several quarters.
As property tax collections continue to fall, Dadayan said municipalities will need to find alternate revenue sources.
NOTE: The Census Bureau revised tax figures for California after this story was initially published. Numbers in the article have since been updated to reflect the changes.
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