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Monday, March 19, 2012

State Taxes

The Rockefeller Institute details the continued, yet slower paced, growth in state tax collection in the fourth quarter:

Preliminary data for the October-December quarter of 2011 show further growth in state tax collections, with gains now coming for every quarter over two full years. However, such growth softened considerably in the second half of 2011. We will provide a full report on the October-December period after Census Bureau data for the quarter are available.
The Rockefeller Institute's compilation of preliminary data from all 50 states shows collections from major tax sources increased by 2.7 percent in nominal terms in the fourth quarter of 2011 compared to the same quarter of 2010. This is a noticeable slowdown from the 11.1 and 6.1 percent year-over-year growth reported in the second and third quarters of 2011 respectively.
The growth was dampened by a 3.8% decline in corporate taxes in Q4 2011 as compared to Q4 2010 (anyone's guess as to why Q4 2011 taxable earnings were lower considering "reported" earnings were higher is better than mine).

Over the longer term, we see that while state tax revenues have increased in nominal terms, they have declined over the past decade or so relative to nominal GDP. The chart below shows state tax revenues (by component) normalized to GDP, indexed at 1 as of December 1998 (the furthest back I could pull data). What we see is volatile, yet declining corporate taxes and a consistent decline in personal, sales, and overall taxes.

Why the decline?

Some initial thoughts.... the aggregate "state tax revenue pie" may be declining as states fight for tax dollars in a battle where nobody wins except corporations or perhaps economic growth is becoming less "taxable" as service sectors move underground (services seem to be harder to track than products) and products become less taxable as corporations outmaneuver states' ability to adapt to new technology.