State Tax Revenues Plunge In Q2

The latest confirmation that the US economy continues to deteriorate comes not from the Federal Government but from state-level data, where year-over-year growth in state tax revenues slowed in the first quarter to its lowest rate since the second quarter of 2014, according to the latest data published yesterday by the Rockefeller Institute of Government. Worse, preliminary data for the second quarter show an outright decline in state tax collections relative to the second quarter of last year.

As SMRA notes, state tax collections were up 1.6%, year-over-year, in the first quarter, the smallest increase since the second quarter of 2014. After adjustment for inflation, revenues were up 0.4%. Personal income tax collections, which account for roughly 36% of total state revenue, increased 1.8% in the first quarter, down from 5.1% in the fourth quarter. Sales tax collections - the second largest source of state revenue - increased 2.4% in the first quarter, up from 2.0% in the first quarter.

The trend deteriorated further in preliminary Q2 data with personal income tax tumbling nearly 5% Y/Y.

Corporate tax receipts, which account for less than 5% of state revenues, were down sharply for the second consecutive quarter, while motor fuel taxes, which also account for just under 5% of revenues, were up 2.0%, down from 3.5% increase in the fourth quarter.

According to preliminary estimates from Rockefeller, tax collections will be down 2.1% in the second quarter relative to last year, reflecting a decline of 3.3% in personal income taxes and a 9.2% plunge in corporate tax collections.

Sales tax revenue is estimated to have increased.

Rockefeller attributes the recent softness in personal income tax collections to a variety of factors, including weakness in the stock market, in both 2015 and the earlier part of this year, which has depressed tax collections related to investment income. Tax collections have been particularly weak in states with economies that are heavily reliant on oil or other natural resources. In the second quarter, growth in individual income taxes from withholding has slowed considerably.

The suddenly plunge in state income tax should not come as a surprise: the trend in individual income taxes at the state level in recent quarters tracks the sharp decline we have reported previously at the federal level.

For most states, the second quarter marks the end of the fiscal year and the current fiscal year began on July 1. According to Rockefeller, most states forecast weak income and sales tax growth for fiscal 2017. Also, in many states 2017 budget projections were prepared before the second quarter and don't yet reflect the downside surprise in April tax receipts. In the words of the analysts at the Rockefeller Institute the outlook for state budgets in the 2016-2017 fiscal year "remains gloomy."

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