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Consumer Spending Decline Slashes Tax Revenues

In what underscores the severity of the recession, a recent report shows that state and local sales tax revenues declined in the 4Q at the fastest pace in 50 years and early 2009 data shows further declines. The report by the Nelson A. Rockefeller Institute of Government at the State University in New York noted that state tax collections fell by 4% in the 4Q, with 41 of the 50 states experiencing declining revenues. Sales taxes, which are usually the largest or second-largest source of state tax revenue, suffered a 6.1% drop. "While income growth has slowed, the big story so far is that consumption of goods, especially durables, has been declining," said Donald J. Boyd, senior fellow at the Rockefeller Institute and study co-author. "This is a classic response of consumers to economic uncertainty and fears of lower income: eliminating, postponing, and scaling back purchases of items that are not necessary or not needed immediately, such as new cars, washing machines, and so on." In addition, personal income tax collections fell 1.1% while corporate income tax revenue fell 15.5%.

Preliminary data for the January-March quarter suggests that fiscal conditions deteriorated even further. "With data for January and February now available for 41 states, tax revenue for the two months combined has declined by 12.8% versus the same period last year," Boyd noted. The consumer spending crisis has created such a tax revenue shortfall that states are having trouble funding basic services. As a result, states are battling over federal economic stimulus funds needed to fill budget gaps.

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Date Last Updated: 04/22/2009