The ebb and flow of tax collections

By Cate Long
September 21, 2011


The Rockefeller Institute of Government publishes some useful statistics on the collection of state taxes, and I’ve been puzzling over them for a few weeks. What I was trying to reconcile was the difference between the states’ aggregate tax collections and the official economic pronouncements that dated that the recession’s end at June 2009. When the NBER Business Cycle Dating Committee, the official scorekeepers of the business cycle, made its pronouncement, The Economist sketched out some of the reactions to it:

The response to this announcement, already echoing through the blogosphere, is that hey, it doesn’t feel like the recession is over! The dating committee realises this:

In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month.

A recession is a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. The trough marks the end of the declining phase and the start of the rising phase of the business cycle. Economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion.

So the officials declared the economic morass over while bloggers proclaimed the economy didn’t feel as if it were growing briskly. State-level tax collection data proved the bloggers right up until the 3rd quarter of 2010 when all types of tax revenues start to increase. From the 2nd quarter of 2010 onward, we begin to see strong gains for state sales tax collection, almost double the rate of inflation.

State and local sales tax data always seemed to me an interesting proxy for the economic activity at all levels of society because unlike income taxes everyone pays sales taxes. Given how strong state-tax collection looks for the last 5 quarters it’s a little puzzling that the national economy only expanded 1 percent in the second quarter of 2011 over the previous quarter. I’m curious for any explanation of the divergence between national numbers and state-level numbers.

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