Tax Revenues Spell Good News for States

After several years of financial pain, states finally are seeing signs of hope. States raked in more tax dollars in early 2004 than in any quarter in nearly four years, a new report shows.

All but a couple of states reported higher tax collections compared to the same quarter last year, according to a June 16 report from the Nelson A. Rockefeller Institute, the public policy research arm of the State University of New York. Higher oil prices helped boost Alaska’s tax revenues, which increased nearly 44 percent. Delaware, Maryland and Oklahoma all saw tax revenue climb more than 20 percent. States seeing meager gains (less than 2 percent) included Massachusetts, Minnesota and Wisconsin.

Overall, state tax revenue grew by 8.1 percent in January to March 2004, compared to the same period in 2003, the strongest growth rate in almost four years, according to the report. Personal income-tax revenue grew by 8.7 percent, matching pre-recession levels, the institute said.

Every region saw a boost in tax revenue, but the Mid-Atlantic had the strongest growth at nearly 13 percent, said the report, which includes a state-by-state and region-by-region ranking. The slowest growth was in the Great Lakes region at 3.4 percent.

Nicholas W. Jenny, who wrote the 16-page study, credits a boost in personal income-tax revenues and state tax changes for states’ brighter financial picture. States imposed tax hikes generating $1.1 billion in the January-March 2004 period. New York had an increase of more than $201 million and Ohio saw nearly double that — $400 million — because of higher sales tax rates.

Although there are no revenue numbers yet for the final quarter of fiscal 2004, which ends June 30 for all but four states, Jenny predicted the fiscal year should end on an up-note for most states. But he cautioned that revenue growth will not be strong enough to counter rising health care costs. Plus, many states already have depleted their “rainy day” budget reserves.

“While the hangover from the budget crisis of the last two years has not completely dissipated, there is now reason to hope that there will be no more bad news from the revenue side of the budget equation. At least for now,” Jenny concludes in his report.

The Rockefeller findings are yet another indication that states’ worst financial pains may be behind them. The National Conference of State Legislatures reported in April that 32 states expect to end fiscal 2004 with a modest surplus, although NCSL also predicted that 33 states expect to have budget gaps for fiscal 2005.

A May report from the nation’s governors and state budget officers found that the number of states making mid-year cuts this year is fewer and the dollar amount of cuts less than last year when 40 states were forced to cut budgets by $11.8 billion after the budgets already had passed. But the governors’ report also warned that recent signs of a national recovery won’t make it any easier for states to balance their budgets this year and that rising health care costs are a major culprit.