Monday, July 7, 2008

The State of State Taxes

State tax revenues continue to be clobbered by a slowing U.S. economy with:

  • Increasing layoffs / declining equity market (less personal income to tax)
  • Declining consumption (less sales tax)
  • Rising inflation / banking losses (less corporate profits to tax)
  • Housing recession (lower real estate valuations to tax)
How bad is it? Looking at year over year REAL changes in state tax revenues (the inflation rate is backed out by the BEA State and Local Government Implicit Price Deflator), each of the four major state taxes have shown multi-quarter declines for the first time since the effects felt from the 2001 recession.

While this reveals the strain state and local governments must be feeling, it also reveals further deterioration of the U.S. economy. Specifically, since The Rockefeller Institute of Government began to track this data in 1991, sales tax revenues have NEVER seen this level of decline, down 5 straight quarters and a whopping -5.8% in 1st quarter 2008 as compared to a year ago. There is an old saying to "never bet against the U.S. consumer". Between stretched budgets and sky-high oil prices this time may be different.

Source: The Rockefeller Institute of Government

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