State Tax Revenue Growth in 2005

The Rockefeller Institute of Government released a study last week of state tax revenue collections for the 2004-05 fiscal year. The results seem very positive for the states, as revenue was up in all categories. Nationwide, the personal income tax was up 12.5 percent, corporate income taxes were up 31.7 percent, and sales taxes were up 6.7 percent over the prior year. Overall, tax collections were up 10.7 percent; even adjusted for inflation and legislative changes (i.e., tax increases), the results still showed a year over increase of more than 9 percent overall.

This is good news for individuals and businesses. Paying taxes means you made money (or in the sales tax category, you spent it). These figures reflect actual tax collections, meaning money in the bank for the states, which is a solid indicator of growth. Significantly, the study reports that not a single state underperformed their budget expectations. However, some care must be taken in evaluating whether an individual state's results were affected by legislative changes.

Not all regions fared equally well. The Midwest was among the weakers performing areas in terms of tax growth. Within this regions, Michigan was among the weakest, with personal income tax growth of only 2.2 percent (the lowest nationwide) and business tax growth of only 4.6 percent (nearly the lowest). Struggles in manufacturing have apparently hit both business and individuals, as further reflected by tepid sales tax growth of only 3.1 percent (among the lowest nationwide).

Iowa also did relatively poorly, with personal income tax growth of 7.6 percent, corporate income growth of 19.6 percent, and sales tax growth of 4.2 percent. (Iowa cut its taxes by 85 million during this period, representing 1.7 percent of overall collections - one of the largest cuts nationwide. This could bode well for the future, though it makes Iowa look a little weak during this priod.)

Nebraska was slightly stronger than Iowa, with 12.0 percent, 18.5 percent, and 10.5 percent, respectively. Nebraska's personal income tax growth lead the "great Lakes" and "Plains" regions, which encompass most of what we consider the Midwest. Leading the Midwest in corporate income growth was Kansas at a blistering 60.1 percent, followed closely by Minnesota at 47.4 percent. (Neither of which was attributable to tax increases.) Surprisingly, Missouri was a laggard in both personal and corporate income taxes in this region. (Of course, Missouri also reaps significant tax revenues from gambling, which are apparently not included in these figures.)

Which regions fared the best? The Far West region showed growth of 15.1 (personal) 53.5 (corporate) and 9.2 (sales), for overall growth of 15.8. Much of that was in California, where a corporate tax amnesty program generated large increases in corporate taxes. Rocky Mountain and Southwestern states also did well

The possibility that tax figures can be affected by legislative changes, which provide a short term boost for those "locked in" to the state who cannot escape the tax increase, needs to be considered in evaluating these figures as a barometer of the future. Of course, population trends will also affect tax collections, making per capital collection figures more relevant. And, of course, the matter of other kinds of taxes - like those on gambling - can affect growth figures in particular years if states shift from one kind of taxation to another.

The full text of the report can be found here:
http://rfs.rockinst.org/exhibit/9046/Full%20Text/SFB75.pdf

Happy Monday.
EAM