Tax Revenue Snaps Back - States Book More Inflows but Face Tab for Higher Spending, End of Federal Funds
State and local tax revenue has nearly snapped back to the peak hit several years ago—a gain attributed to a reviving economy and tax increases implemented during the recession.
But the improvement masks deeper problems for state and local governments that are likely to linger for years. To weather the recession, state governments relied on now-depleted federal stimulus funds, which allowed them to put off painful cuts that would have otherwise been necessary to balance budgets. Meanwhile, demand for government services and the tab for public-worker pensions and health care have continued to grow.
Part of the upturn in state revenue can be traced to tax increases imposed during the recession. For 2010, tax hikes boosted state revenue by $12.3 billion, about 2%, according to the Nelson A. Rockefeller Institute of Government.
The latest tallies show a diverging trend in the fiscal health of state and local governments. While state tax revenue increased every quarter of 2010, including a 6.7% jump in the fourth period compared with a year earlier, local tax revenue fell in the first and fourth quarters—in part because of slumping real-estate tax receipts.
While states are primarily funded by sales and income taxes—which tend to grow along with an expanding economy—the nation's 89,000 cities, school districts and other local governments depend heavily on property taxes.
It typically takes a few years for falling housing prices to show up in property-tax receipts, and the latest Census figures suggest that is now happening.