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State tax revenues slip back to slower growth

The Rockefeller Institute said in a note about fourth-quarter state tax revenues that revenues continue to be positive, but they have slowed from the first half of the year. Personal income taxes made up about 41 percent of total state tax revenue in the fourth quarter of 2013 and slowed considerably from the first half of the year. Rockefeller writes:

The state personal income tax revenue picture in the first two quarters of calendar year 2013 represented the strongest growth since the start of the Great Recession. However, the growth in personal income tax collections softened in the third quarter of 2013 and was a mere 1.0 percent in the fourth quarter of 2013.

Personal income taxes are the bedrock of state tax revenues. But state sales taxes are also important and showed nice, steady gains. From Rockefeller again:

Sales tax collections increased by 5.5 percent in the fourth quarter of 2013 compared to the same quarter of 2012. According to preliminary data, only six of 45 sales-tax states reported declines in sales tax collections compared with the same quarter last year. Arizona had the largest sales tax decline at 14.4 percent, followed by Georgia at 4.6 percent. The large sales tax decline in Arizona is mostly due to expiration of a temporary one-cent increase in sales tax of three years ago. The following five states reported double-digit growth in sales tax collections: California, Maine, Minnesota, Ohio, and Virginia.

Rockefeller sums it up:

The strong growth recorded in the first half of 2013, as discussed in previous State Revenue Reports, appears to have been mostly attributable to the acceleration of income to tax year 2012 by some taxpayers driven by the fear of potential federal tax rate increases in tax year 2013. We now are witnessing the earlier warnings that the ‘bubble’ in income tax receipts would be short-lived. And, quite likely, the growth in personal income tax collections will be much softer in the first half of 2014 as well. However, in most states, the overall trend in tax collections for fiscal 2014 is positive.

The story behind state business incentives

Louise Story of the New York Times made an epic journalism effort late last year when she documented the level of state business incentives made to corporate entities. The team arrived at the massive number of $80 billion per year of state and local inducements that go to private firms. From their reporting:

A Times investigation has examined and tallied thousands of local incentives granted nationwide and has found that states, counties and cities are giving up more than $80 billion each year to companies. The beneficiaries come from virtually every corner of the corporate world, encompassing oil and coal conglomerates, technology and entertainment companies, banks and big-box retail chains.

State tax collections totaled $794 billion in 2012. So the $80 billion figure would equal about 10 percent of state tax collections. Does spending 10 percent of state revenues spur economic activity? If it does, it could be a bargain. From the Times again:

Higher online sales mean less state tax revenues

States on average derive about 49 percent of their revenue from sales taxes, so holiday shopping results are important for state treasuries. Unfortunately, the early read on holiday retail sales looks pretty bleak. Reuters reports (emphasis mine):

As the U.S. holiday season winds down, retailers are left to hope that post-Christmas sales can help salvage their worst performance since 2008, preliminary data showed.

Holiday-related sales rose 0.7 percent from October 28 through December 24, compared with a 2 percent increase last year, according to data from MasterCard Advisors SpendingPulse.

High-taxing states and debt

The Tax Foundation named names in a new report that details the states that have the heaviest tax structures. The report compiled personal and corporate income tax, sales tax, unemployment insurance and property tax rates, and it used this data to rank states by their tax burdens. The Tax Foundation describes the purpose of the effort:

State Business Tax Climate Index enables business leaders, government policymakers, and taxpayers to gauge how their states’ tax systems compare.

Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: the corporate tax, the individual income tax, or the sales tax.

A conservative revolt on cutting taxes

Voters and legislators in two very red states, Oklahoma and North Dakota, have recently defeated conservative initiatives to eliminate important taxes. Among some Republicans, there seems to be a realization of the need to pay taxes to fund essential services like schools and police and firemen, and of the need to find other sources of revenue once a given tax is repealed.

North Dakota has become the first state in the nation to propose and subsequently defeat a constitutional amendment banning property taxes. The proposal, Measure 2, would have given all local revenue decisions to the state legislature without detailing how the process would work. It was overwhelmingly rejected – by 77 percent of voters. This comment in the Bismark Tribune seems to capture the reasoning of voters on the issue:

I voted “no” on M2 because it was too vague and when I inquired supporters on how funding gets reacquired they kept stating that politicians will be forced to rethink the budget when, in reality, politicians always get funding by raising taxes. There is no such thing as a vacuum in government budgets and this argument relies on common sense in government actually taking effect. If Mandan elects a grocery personality with dubious managerial skills (I worked for the guy, he severely lacks leadership), then I have serious doubts that politicians will “rethink” anything.

Oklahoma cuts taxes while other states fund its social programs

Conservatives are working in legislatures across the country to eliminate or reduce state and local tax rates with the stated purpose of promoting job creation. These legislative efforts have received support from the American Legislative Exchange Council (ALEC), an ultra-conservative lobbying group. Oklahoma Governor Mary Fallin is the latest beau ideal for ALEC’s fiscal austerity drive as she leads the charge to eliminate her state’s income tax. She writes in the introduction to ALEC’s latest edition of “Rich States, Poor States”:

I have been committed to these fundamental principles for years, and we are seeing incredible results because our legislators have had the courage to stand with me in support of conservative governance. Oklahoma’s economy is outperforming the national economy, and our success stands in stark contrast to the record of dysfunction, failed policies, and outrageous spending that occurs in Washington, D.C. Oklahoma could teach Washington a lesson or two about fiscal policy and the proper size and role of government – and so could the tax and fiscal policy reforms espoused by ALEC.

I’m all for state and local governments shrinking their workforces and learning more efficient ways to deliver government services. There is nothing sacred about the current level of the government’s labor force, especially at a time when the non-public sectors of the society are continuously seeking to deliver goods and services with fewer economic inputs. It is only fair that we ask similar efforts of the public sector.

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