State tax revenues rise -- finally!

By Tami Luhby, senior writer


NEW YORK (CNNMoney.com) -- After nearly two years of seeing their tax revenues plummet, states are finally getting a little good news.

States' tax revenues rose 2.5% in the first quarter of 2010, compared to the year earlier period, according to a report published Tuesday by the Rockefeller Institute of Government in New York.

The income tax and sales tax grew at 2.5% and 0.4%, respectively, while the corporate income tax declined by 0.6%.

This bump marks the first gain since the third quarter of 2008. And the data backs up a June report, co-authored by two other state-focused organizations, that predicted states were hitting bottom.

However, most states still aren't celebrating their good fortune. The growth was largely due to tax hikes in California and New York, the Rockefeller Institute found.

Not including these two states, tax revenues dipped 1.5%. Some 33 states reported tax declines during the first quarter, with five states reporting double-digit dips.

Also, preliminary data for April and May indicate that states' revenues will likely be weaker in the second quarter. Data from 42 early reporting states show tax collections for those two months inched upward less than 1%, compared to a year earlier.

"After record tax declines in calendar 2009, the fiscal conditions of the states remain quite fragile," wrote Rockefeller Institute Senior Policy Analyst Lucy Dadayan and Senior Fellow Donald Boyd, the report's co-authors. "Even if the economic recovery is as rapid as those from prior recessions, it would likely take state tax revenue several years to recover to its previous peak."

The New England, Mid-Atlantic, and Far West regions all saw increases in tax collections, while the remaining regions suffered declines. The Rocky Mountain region reported the largest drop-off at 8.1 percent.

States are eagerly awaiting the end to plummeting tax revenues, which wreaks havoc on their budgets. Governors and lawmakers just finished slashing $89 billion from their budgets for fiscal 2011, which began July 1 in 46 states, according to the National Conference of State Legislatures.

Going forward, states will have to cope with the end of the federal stimulus program, which has helped prop up their budgets since early 2009. And state economies usually take 18 to 24 months longer to recover than the national economy. To top of page

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