Washington’s Revenue Growth an Outlier: Rockefeller Institute Reports “Gloomy” Revenue Outlook Ahead for Many States

We reported yesterday on the modest uptick in the state’s official revenue forecast. Even acknowledging, as we do, that the growth may be insufficient to meet school funding demands variously estimated to be in the billions, the revenue growth is a sign of continuing strength in the state economy.

That’s a point also made by the Olympian’s editorial board, which warns of the costs of education funding and public employee collective bargaining agreements. Still, the editorial points out,

…the total of newly expected funds to the neighborhood of a half-billion dollars for both budget periods. Taxes from real estate sales are a part of the increase.

All that is good, and better than the opposite — a decrease. But the growing economy isn’t a silver bullet for the state’s pending budget problem for the 2017-2019 biennium. 

Some states are not faring so well. A Reuters story alerted us to a new report from the Rockefeller Institute of Government at The State University of New York.

Rockefeller’s overview of state revenues finds,

State and local government taxes have continued a slowdown that began in the middle of 2015 and that has extended into the second quarter of 2016. State and local government revenue from major taxes tracked by the Census Bureau grewby 3.0 percent in the first quarter of 2016, the most recent quarter for which we have full details, which is a substantial slowing from the 5.4 percent average for the four previous quarters.

Total state tax revenue from all sources grew by 1.6 percent in the first quarter and preliminary data for the second quarter of 2016 indicate declines of 2.1 percent. The declines in state government tax revenues in the second quarter appear to have been driven by the weak stock market of 2015, and by slowing growth in sales tax and withholding collections.

The outlook for state budgets in the 2016-17 state fiscal year, which began on July 1st in forty-six states, remains gloomy.

The report will likely raise some of the usual questions about the best tax structure for sustainable growth. For example,

The recent weakness in tax revenue has been caused by:

  • A sharp slowdown in the income tax, caused by slow growth in withholding on wages and declines in payments associated with nonwage income in the second quarter of 2016…
  • Continued weakness in the sales tax, consistent with weak growth in taxable consumption…
  • Outright declines in corporate income taxes.

The brief report is worth reading in its entirety. What seems to be clear is there is no “silver bullet” to be found in an examination of state tax structures.