State Revenues Turning the Corner?

The Rockefeller Institute of Government issued a report today that says state revenues are in a “gradual recovery” after their record decline of recent years.  The new data that Rockefeller has collected for the report (on revenues for the April-June quarter) are helpful. But it’s too early to say that state finances have turned the corner.

To understand why, here’s a little background.  States get most of their revenue from taxes on income, sales, business profits, and related sources.  Those revenues are way down because the recession has taken a huge bite out of economic activity in most states.  Revenue shortfalls have already caused most states to cut education, health care, services for seniors and people with disabilities, and other areas.  States and local governments have also cut over 400,000 jobs, and more job cuts are on the way.

The most recent Census Bureau report on state revenues relied on estimates rather than actual revenue reports for a few states, so the Rockefeller Institute contacted those states directly to get the latest figures for its new report.  We’ve revised our revenue calculations using the new Rockefeller figures and found that, in fact, revenues were a bit higher in state fiscal year 2010 (the period ending in June 2010) than 2009.

But that is far from what you could call a recovery.  Here’s why:

• Even using the new Rockefeller Institute data, revenues in 2010 remain 13 percent below pre-recession levels, adjusted for inflation.  The revenue decline during this recession is the biggest on record.
• Tax revenues in 2010 were propped up, in part, by sales and income tax rate hikes and other measures that states enacted in 2008 and 2009.  Without those changes, revenues would have kept falling, the Rockefeller report says.  But many of those tax-rate increases are temporary and scheduled to expire soon.
• Extra federal aid to states is also expiring.  States have received $165 billion in emergency aid from last year’s Recovery Act and the August 2010 jobs bill.  This aid is helping them close their budget shortfalls with fewer layoffs, cuts in public services, and tax increases than would have taken place otherwise.  But that money will almost entirely run out at the end of this fiscal year — for most states that is eight months from now, at the end of next June.
• While revenues have declined, the cost of providing services has kept rising, due both to rising overall population and a growing population in need.  Medicaid enrollment jumped by 3.8 million just between December 2008 and December 2009, for example, as families lost jobs, income, and access to affordable job-based coverage.
• The combination of sluggish revenue growth, diminishing federal aid, and rising costs means that states will face their biggest fiscal challenges ever next fiscal year, which starts next July in most states.  Already, states are projecting $112 billion in shortfalls for fiscal year 2012, as we reported earlier this month, and we expect that figure to grow.

In short, the worst is far from over.  States are going to need to put everything on the table when they write next year’s budgets — and that should probably include changing state tax codes in order to replace some of the recession-induced revenue loss.