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Thursday, November 25, 2010

Challenges in Funding State Government

Challenges in Funding State Governments

It is the economy…still the biggest challenges facing state and local governments.    State and local tax revenues have been declining since 4th quarter 2008, and corporate income taxes have been declining since 3rd quarter 2007.   The recession impact was felt at the state and local government tax receipts for 5 quarters (4th Qtr 2008 through 4th Qtr 2009).    Year over year for 2010 inched up at about 2% rate (1st and 2nd quarter 2010 compared to 2009) state tax revenues.     This according to the Rockefeller Institute recent report on state and local government finances.   
             However, state revenues took a major hit as tax collections were off about 20% below expectations over a 2-year period of economic slowdown (late 2008 through early 2009).   Planning for FY 2011 budgets will be a challenge, as all of the stopgap measures have been exhausted and some real budget cuts will still be required to balance state budgets.    In Colorado, the FY 2011 budget shortfall is estimated to be $1.5 billion, as compared to a $19 billion state budget.   In New Mexico, another $250 to $400 million needs to be cut from this FY budget, and it is likely that more reductions will be needed for FY 2012 (that starts July 1, 2011).
The Southeast and Rocky Mountain regions reported the largest declines in personal income tax collections at 9.6 and 6.3 percent, respectively. In fact, each single state in both regions reported declines in personal income tax collections.    In Colorado, personal income tax withholding was down about 4% in late 2009, but had slightly increased to about 3% (increase) in 2nd Quarter 2010.   According to the Rockefeller Institute, Colorado and New Mexico were experiencing declining economic activity in August 2010, as compared to the rest of the United States.   Texas continued to maintain economic growth, although is has slipped from 7th in FY06 to 13th in FY11 on the Tax Foundation state business tax climate index. 
The Rocky Mountain States are slipping on the Tax Foundation index, with New Mexico falling 10 slots from FY10 (#23) to FY11 (#33).   Under 4 years of a Democrat majority in both legislative assemblies and a Democrat Governor in Colorado, the state fell from FY08 (#10) to FY11 (#15) in the Tax Climate index.    Whereas the state of Utah as steadily moved from FY06 (#15) into the top ten FY11 (#9) in the Tax Climate index.  Arizona dropped one notch below New Mexico to FY11 (#34) after several years in the high 20’s in the Index.
Bring up the rear in FY11 are New York (#50), California (#49), New Jersey (#48), Connecticut (#47) and Ohio (#46).     Each of these state are characterized by high tax rates, significant public labor unions, and significant taxes on capital (such as California with almost 10% state tax on capital gains).
As various states struggle with a weak economy, it is likely that those states that reduce public spending and reduce dependence on government programs (and thus are able to reduce tax rates), but at the same time create a business friendly environment, are more likely to succeed economically going forward.   Clearly, as California and New York have experienced, their model is not working.  Whereas the Texas model and the Florida model are enhancing economic growth due to a better tax climate and business friendly state policies.     In the United States we have 50 models of state level democracy and free market capitalism underway.    The high tax, high regulation and high public union states are not competitive (nor financially sound), whereas the lower tax, lower regulation and less public union states are more competitive and fiscally sound.

© 2010, Jasper Welch, Four Corners Media,  

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