Declining Personal Income Strains State Revenues

Economic belt-tightening has slowed down the level of wage increases in most states, leaving fewer dollars for tax-collecting state governments that are already feeling the pinch.

Forty states— accounting for about 70 percent of U.S. personal income– saw personal income growth rates decline during the second quarter of 2001, according to numbers released last week (10/24) by the U.S. Bureau of Economic Analysis.

Stagnating income growth, declining corporate tax revenues, and spiraling sales tax receipts since terrorists attacked Sept. 1l have produced a grim economic outlook for states, said Steve Cochrane, senior economist for Economy.com, a provider of financial research and adviser to states such as North Dakota.

“It’s trouble for state governments,” Cochrane said.”There aren’t any channels of growth right now for state revenue. States are going to have to be in a penny-pinching mode until we see any kind of turnaround in the economy.”

Illinois, where economic experts say the state is officially in a recession, had counted on receiving nearly $9 billion from personal income taxes this fiscal year. The worsening economy means the state will have about $175 million less in taxes to spend.

Illinois had a personal income growth rate of .07 percent from April to June, the Bureau of Economic Analysis said.

Nationally, personal income growth slowed to 0.8 percent in the second quarter of 2001 from 2.1 percent during the same period last year. Personal income growth from January to March was 1.4 percent.

The slowdown in the second quarter, representing the smallest growth rate since 1999, was caused by declines in manufacturing, construction, transportation and public utilities, economic experts said.

Nevada (1.5 percent), New Mexico (1.5 percent), California (1.2 percent), and Florida (1.2 percent), led the nation in personal income growth during the second quarter of 2001, the federal data showed. Finance, insurance, and real estate stimulated the growth, the government said.

The bureau’s data includes income received by a state’s residents including wages, government benefits such as Social Security, income from rental property, and dividends from stocks or savings accounts.

Michigan and Indiana, heavily manufacturing-dependent states, had personal income growth of 0.7 percent and 0.6 percent respectively in the second quarter of this year.

Forty-seven states had personal income growth rates that were above the 0.3-percent increase in prices in the second quarter.

But North Dakota (0.2 percent), Iowa (0.2 percent), and West Virginia (0.3 percent) had the slowest growth in personal income. As a group, these states accounted for about 1.6 percent of U.S. personal income but contributed only about 0.5 percent of the $72 billion U.S. growth.