State Tax Revenues Close in on Milestone But Have a Long Road Ahead

First, the good news:  new Census Bureau data show that state tax revenues have returned almost to pre-recession levels, after adjusting for inflation.  It’s taken over five years since the recession started for that to happen, much longer than in previous recessions (see chart).

Now, the not-so-good news:  much of the recent revenue gain may be a one-time shift in tax payments.   As we wrote previously, the scheduled expiration of the 2001 tax cuts at the end of 2012 gave high-income taxpayers an incentive to sell stocks and other investments before 2012 ended and take other steps to move income into 2012.  The Rockefeller Institute found multiple indications that taxpayers did exactly that.

Thanks to all that income shifting, states saw their revenues surge when high-income people paid their taxes for 2012.  But that’s just an aberration, not a sustainable increase.

Finally, the bad news:  state revenues may be nearly back to pre-recession levels but, in the meantime, the needs they must address have greatly expanded.  Public K-12 schools have 775,000 more students in the 2013 school year than in 2007; public colleges and universities have 3.2 million more students.  Nearly 9 million more people are eligible for Medicaid, and the unemployment and poverty rates are much higher than six years ago.

So, while state revenues have hit a milestone, they haven’t truly recovered from the recession and they aren’t adequate to address growing state needs.