Unlike the Federal Government, the 50 states are required by their constitutions to run balanced budgets. This presents a serious problem when the economy turns south, since spending on things like unemployment insurance and some social services goes up, and tax revenues go down.
This post is on the latter part of the problem. The Nelson Rockefeller Institute of Government just came out with a report on just how much state tax collections have fallen in the first four months of the year (including the very important month of April). The charts below are from that study by way of http://www.calculatedriskblog.com/.
The first one shows that the vast majority of states with personal income taxes have seen sharp declines versus last year in collections. Only three (small) states have seen an increase in personal tax collections vs. a year ago. There were no data for four states and 33 states reported falling revenues. Ten states, including Texas and Florida, do not have state income taxes.
Eight states have seen drops of at least 30%. There is a very high correlation between the states with the biggest fall in tax revenues and those with the highest unemployment rates.
Personal income taxes are not the only taxes the states collect, and how important they are to the state’s overall budget varies greatly. The second chart shows the overall effect on total state revenues from the decline in state personal income taxes. However, business income taxes and sales tax collections are not exactly booming, either.
Looking at the second chart it is easy to see why states like California and New York are in such financial distress. There is a substantial risk that we will have in effect 50 mini-Hoover’s as each state is forced to either raise tax rates or cut spending. Both would put substantial drags on the economy.
Companies with substantial operations in the hardest hit states will face a tougher time than those in relatively unaffected states.One group that tends to have very clear geographic profiles are the Utilities.The poor financial condition of California means that PG&E (PCG) faces a substantial headwind, and the same is true for New York and Con Ed (ED).
Read the full analyst report on “PCG”
Read the full analyst report on “ED”
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