Plunging state tax collections threaten public construction

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plunging state tax collections threaten public construction

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Jim Haughey

RCD Chief Economist

Oct 16, 2009

The tax data collected by the Census Bureau and the Rockefeller Institute of Government also show a 2.8% year over year drop in local government tax collections. While property taxes rose 3.1%, income and sales taxes plunged. Property taxes assessed will continue to rise slowly, but taxes actually collected may decline in the next few quarters. This will extend the negative impact on public safety and K-12 buildings.

Adjusted for inflation, state tax collections fell 17.8% in the second quarter from a year ago. This is more than a $40 billion drop. The second quarter will be the worst in this cycle because it included the period of the steepest economic decline during the recession and the annual income tax payments on non-withheld income, such as bonuses and capital gains. New York State reported a 47% fall in non-withheld tax payments in the second quarter – twice the national average – reflecting the sharp cutback in Wall Street bonuses. However both bonuses and capital gains are now rising again.

Regionally, the largest drop in tax collections occurred in the Pacific region (-19.8%), followed by the Rocky Mountain region (-18.9%). The smallest declines were in the Midwest (-13.5%) and the Southeast (-14.3%). Both of these regions make relatively smaller use of progressive income tax rates which exaggerate the boom-bust in tax collections. Excluding Alaska with its unique situation with taxes on oil production, the largest second quarter declines were in New Mexico (-30.8%), Oregon (-27.3%), and Arizona (26.7%).

The cumulative impact of the recession on state tax collections has been by far the largest in Florida. Measured from the four quarters ending when tax collections peak to the last four quarter, Florida’s tax collections fell 27.5%. Arizona, South Carolina, Georgia, Virginia and Utah experienced 18-20% drops. Both Wyoming and North Dakota have not yet suffered a decline in tax collections. South Dakota, Iowa and Indiana have recorded less than a 4% drop.

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