Falling tax revenues slam states in the U.S. – down 17% from a year earlier

Sep 30, 2009. State tax revenues in the second quarter plunged 17% from a year earlier as rising unemployment and reduced spending hurt sales- and income-tax collections.

The decline was the sharpest since at least the 1960s. The biggest drop among major revenue sources was in state income taxes, which were down 28% from a year ago. Sales-tax revenues fell 9%. About two-thirds of state revenues are derived from sales and income taxes. The numbers aren’t adjusted for inflation or changes in tax rates.

The steep declines show how the recession continues to cripple state finances, despite support from the federal stimulus package and signs of a nascent recovery in economic activity.

State Taxes - Cash CrunchBut with tax collections continuing to decline, many have been forced to reopen budgets after they have been passed to push through even bigger cuts to staffing and services. States, unlike the federal government, are generally required to balance their budgets.

In Michigan, stalled budget negotiations between the governor and the legislature could force state government to shut down if a deal isn’t reached by Wednesday night.

Some of the sharpest tax declines were in states that have been among those hit hardest by the recession, particularly those with high concentrations of jobs in the battered housing sector. In Arizona, overall tax revenues fell 27% in the second quarter. Tax revenues fell 12% in Florida and 14% in California.

States across the country saw big declines in personal income taxes, the largest single source of state funding, representing about a third of states’ overall revenues. Eleven states—including California, New York and Wisconsin—saw personal income taxes fall more than 30%.

Despite signs that the recession is abating, many analysts don’t foresee state revenues rebounding anytime soon. Economists widely expect the national unemployment rate, 9.7% in August, to remain around 9% through 2010, keeping pressure on wages and incomes. At the same time, after losing trillions in wealth, many consumers are paying down debt and paring back spending—reducing sales taxes.

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