Tags: State | Local | Tax | Revenue

State, Local Tax Revenue Climbed 4.1% in Third Quarter

Tuesday, 20 Dec 2011 12:48 PM

U.S. state and local-government tax revenue rose 4.1 percent in the third quarter, for the eighth consecutive gain, the Census Bureau said.

The collections climbed to $292 billion from $280.5 billion a year earlier, the bureau said today. The increase was driven by property, sales and personal-income taxes. Corporate-income levies fell for the first time since the third quarter of 2010.

The revenue gains mark the longest stretch of growth since 2008. The improvement is easing pressure on governments that have struggled with budget deficits since the 18-month recession began four years ago. Rising collections may leave states with extra cash and avert the need for more spending cuts, barring new setbacks to the U.S. economy.

“There’s good reason to be optimistic about what’s occurring,” said Chris Mier, a managing director at Chicago’s Loop Capital Markets LLC who follows the municipal bond market. “The consistency of the growth and the magnitude of the growth are encouraging.”

The collections for the July-through-September quarter, the first three months of the budget year for most states, outpaced forecasts officials assumed when drawing up their spending plans.

State revenue rose by $9.4 billion, or 5.6 percent, to $178.2 billion. That exceeds the 1.6 percent annual gains that states are forecasting for the current budget year, according to the National Association of State Budget Officers.

Mid-Year Deficits

With more money flowing in, fewer states are facing budget deficits this year. Only four -- California, New York, Missouri and Washington -- are reporting such shortfalls, compared with 15 a year ago, according to the National Conference of State Legislatures.

The improvement has helped fuel a rally in the $3.7 trillion municipal bond market, where speculation about defaults diminished as public officials took steps to rein in budget shortfalls. Municipal bonds have returned 10.6 percent this year, according to Bank of America Merrill Lynch indexes.

Last week, Fitch Ratings said it lifted the negative outlook it put on U.S. state bond ratings, in part because of the lower deficits projected for next year.

The increase in property-tax levies also marked an improvement for local governments, whose revenues were diminished by tumbling home values. Property-tax collections rose 1 percent in the quarter after falling during the previous three quarters, the bureau said.

Risk Reduced

Even with the tax gains, the financial struggles of state and local governments haven’t gone away. Both states and localities continue to fire workers to save money, exerting a drag on the economy. State revenue for the 12 months through September was $764.6 billion, below the $782 billion peak hit three years earlier, and capitals face budget deficits of about $40 billion next year, according to the budget officers’ group.

Those shortfalls are still less than half the $95 billion state officials faced in the current year.

“The risk at the state level -- for most states --- is substantially reduced from what it was a few years ago based on the improvements,” Mier said.

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