U.S. State, Local Tax Revenue Rises at Slowest Pace in Year

U.S. state and local-government tax collections grew at the slowest pace in a year during the last three months of 2011, marking a step back from gains that helped ease strains on public agencies.

Revenue rose 2.1 percent in the fourth quarter from a year earlier to $387.2 billion, the ninth-straight gain, the U.S. Census Bureau said today in Washington. The increase was the smallest since the end of 2010. Property taxes rose 0.2 percent from a year before, the second-straight gain.

The economy’s pickup has lifted tax revenue since late 2009, after the official end of the recession, narrowing budget deficits for states and some cities and lessening the need for cuts in spending and jobs. Still, state collections, which accounted for the bulk of fourth-quarter gains, increased by the least since the second quarter of 2010.

“The economy is recovering and so are tax revenues, but there’s still a lot of weakness,” said Robert Ward, deputy director of the Nelson A. Rockefeller Institute of Government in Albany, New York. “It’s very much a mixed picture.”

The Rockefeller Institute reported this week that it estimated state collections in the fourth quarter grew at the slowest pace in 18 months. It put the increase at 2.7 percent, less than the Census figure today of 3.5 percent.

Still Above Projections

Even with the slowdown, the growth in tax collections toward the end of 2011 outstripped projections when officials put together their spending plans last year. The total gain for states compares with revenue increases of 1.6 percent forecast for the year, which began in July for most states, according to the National Association of State Budget Officers.

While states still expect to collect $49 billion less than they will need in the 2013 budget year, the shortfall is less than half that faced in the current year, according to the Center on Budget and Policy Priorities.

The Census figures show some stability for cities and counties hit by the real-estate rout. Total property-tax collections, a portion of which goes to states, rose to $177.2 billion. It was the second-straight increase after three straight drops that began at the end of 2010. Local governments’ share rose 0.6 percent to $174.1 billion.

Not Over Yet

Ward, who tracks state and local trends for the Rockefeller institute, said the small change in the property-tax collections may not indicate that the worst of the housing market rout is behind local governments, which have also struggled with cutbacks in state aid.

“When property taxes fall or don’t rise, it’s going to have a big impact on local governments,” he said.

Nor are all state struggles over, he said. “I wouldn’t say they’re out of the woods yet either, but at least they’re seeing some continued growth.”

The change in tax collections came as the economy expanded at a 3 percent rate during the fourth quarter, the quickest since mid-2010, as companies rebuilt inventories in anticipation of growing demand. Economists expect a 2 percent expansion this quarter, according to the median estimate in a surveyed by Bloomberg.

The recent slowdown for states may reflect the rebounds from a year earlier, when collections were still recovering from near-recession lows, said Chris Mauro, head of municipal strategy for RBC Capital Markets in New York.

“There’s a real slowdown in the momentum in state tax revenue growth,” Mauro said in a conference call today. “The main reason we’re seeing such tepid improvement in state tax revenue is because we haven’t seen real meaningful improvement in employment and personal income.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE