States Drive 4.7% Gain in Tax Revenue as Fiscal Strains Ease, Census Says

U.S. state and local tax revenue rose 4.7 percent in the year’s first three months, the sixth- straight quarter of growth as governments recover from the fiscal strains brought on by the recession.

Tax collections climbed to $321.6 billion from $307.2 billion in the same quarter a year earlier, the U.S. Census Bureau reported today. The gains were driven by states, which reported a 12.8 percent increase in personal-income tax collection, pushing up revenue by $15.3 billion, or 9.3 percent.

Expansion of the U.S. economy has boosted collections of income and sales taxes, easing the pressure on states such as California that are still working to close budget deficits. Cities continue to be squeezed by a drop in property-tax collections, which slid for a second straight quarter, according to the census data.

“Revenue conditions are slowly improving from very depressed levels for most state governments,” said Lucy Dadayan, who tracks government finances for the Nelson A. Rockefeller Institute of Government in Albany, New York. “However, the fiscal outlook is not nearly as bright for local governments. Most local governments heavily rely on property tax collections which in general respond to property-value declines more slowly.”

Property Values

The S&P/Case-Shiller index of property values in 20 cities fell 4 percent in the year ended in April, the most in 17 months, the group said today. Such declines take a toll on real estate tax revenue when homes are assessed at lower valuations. During the first quarter, property taxes dropped 1.7 percent to $113.3 billion, census data show.

“Local governments are hard pressed with lagging fiscal effects of the recession,” Dadayan said.

The gains in quarterly tax collections pushed state and local governments closer to the 2008 peak, before the financial crisis. During the 12 months through March, state and local governments collected $1.31 trillion in taxes, close to the $1.32 trillion reached during the last quarter of 2008.

The budget strains on local governments this year stoked speculation that municipal-bd defaults would rise when public officials were unable to balance their budgets. Richard Larkin, director of credit analysis at Herbert J. Sims & Co. in Iselin, New Jersey, said the increase in state collections should ease those concerns because states that have been slashing aid to local governments may reverse those cuts.

“A recovery is taking place, particularly at the state level,” Larkin said. “Cities will do what’s necessary to balance their budgets.”

To contact the reporters on this story: William Selway in Washington at wselway@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net.

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