Apr 16, 2009 13 Comments ›› Pat Dollard
State and local sales-tax revenue fell more sharply in the fourth quarter of 2008 than at any time in the past half century, and has continued to erode through the beginning of 2009, according to a report released Tuesday.
The report by the Nelson A. Rockefeller Institute of Government at the State University of New York underscores how swiftly the consumer slowdown has eaten into municipal budgets. The drop in tax revenue has forced cities and towns of all sizes to cut everything from police to summer pool hours, and has sent legislatures scrambling for federal economic-stimulus funds to help ease budget gaps.
“The sales tax has been absolutely hammered,” said Don Boyd, senior fellow at the institute.
State and local sales taxes, among the largest sources of revenue for municipalities, fell 6.1% in the fourth quarter of last year, as consumers bought fewer clothes, ate out less and canceled vacations. Revenue from personal income taxes was down 1.1% in the fourth quarter; corporate income taxes dropped 15.5%, reflecting weaker profits.
The declines have continued through the beginning of this year. In the first two months of 2009, the 41 states that have reported tax revenue saw total receipts decline 12.8%, versus the same period a year ago.
States have so far been hit harder than towns and cities. Overall, states’ taxes declined 4% in the final three months of 2008 versus the same period in 2007, the first decline in six years, according to the analysis of state data by the Rockefeller Institute. Local tax collections rose 3.2%, as gains in property taxes offset falling sales taxes.
While income and property taxes have generally fared better than sales taxes, those revenues are also under stress. Property taxes typically lag behind real-estate prices, because it takes municipalities a year or longer to reassess the home values on which those levies are calculated. With home prices still falling, property taxes are also set to grow more slowly or in some cases decrease.
Carnage in the stock market also is likely to substantially reduce income-tax collections. With tax day on Wednesday, this is the time of year when high-income earners start writing checks to cover capital gains and other investment-based income taxes that have accrued over the past year. “This time around, the checks will be much smaller, and some [people] may be seeking refunds,” Mr. Boyd said.
Further declines in tax revenue could force legislatures — which in many cases used heavy cuts to balance this year’s budget — to make further reductions later this year.