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Stephan Whitaker |

Research Economist

Stephan Whitaker

Stephan Whitaker is a research economist in the Research Department at the Federal Reserve Bank of Cleveland. His current work includes research on housing markets and studies of state and local public finance.

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08.11.2010

Economic Trends

State Revenue Declines in the Fourth District

Stephan Whitaker

Each state in the Fourth District has experienced substantial declines in tax revenue during the most recent recession. Those of us outside the statehouses might not be surprised to hear this, but we may not know the details. How much are revenues down? Did one source of revenue take a bigger hit than others? Are additional tax rate increases and service cuts looming in the near future, or are revenues leveling out?

The slide in state revenues can be characterized by comparing each state’s recent revenue peak to its trough. During this time, total revenue fell between 10 percent and 13 percent for all four states in the Fourth District. These declines are close to that which is seen in the national total of state revenue. To put the recent collection numbers in perspective, consider that Pennsylvania, Kentucky, and West Virginia collected about as much real revenue in the four quarters ending 2010:Q1 as they collected in 2004 or 2005. Ohio has been set back further, to 2003 levels. Although Ohio’s decline from its peak is less than the national decline, Ohio experienced less growth in revenue during the prior expansion period.

Peak to Trough Declines in Total State Revenue

  Peak Trough Decline
(percent)
Level last seen
Ending Total
(billions of dollars)
Ending Total
(billions of dollars)
Ending

Ohio

2008:Q2 27.9 2010:Q1 25.0 11.6 2003:Q4

Pennsylvania

2007:Q4 33.4 2010:Q1 29.6 12.9 2004:Q2

Kentucky

2007:Q1 10.6 2010:Q1 9.6 11.0 2005:Q1

West Virginia

2007:Q3 5.1 2010:Q1 4.7 10.6 2005:Q2

United States

2007:Q3 799.0 2010:Q1 698.5 12.6 2004:Q2

Notes: The figures are summed over four quarters to smooth the highly seasonal revenue flows. The four-quarter sums are labeled by the ending quarter. All figures are adjusted for inflation to 2010 dollars, using the Consumer Price Index.
Source: U.S. Census Bureau; Haver Analytics.

 

Breaking the state’s revenue down into its major sources reveals how the revenue mix has changed from years before the recession (2006 and 2007) to the year containing the latter part of the recession (2009). The four states included in the Fourth District have similar revenue shares. Each collects the majority of its revenue through taxes on personal income and sales. Corporate income taxes and a variety of other taxes and fees provide the remainder of the revenue.

We can see that revenue was lower in each state in 2009. Corporate income taxes are down approximately 30 percent in Pennsylvania and West Virginia, and down 64 percent in Kentucky. Personal income taxes are down 12 percent in Ohio. This is partially offset by a 16 percent increase in Ohio’s other taxes and fees. West Virginia collected 11 percent less sales tax, but 5 percent more personal income tax. Overall, the 2009 collections are still 90 percent or more relative to the 2006–2007 average collections.

Looking over a slightly longer horizon, most states posted strong gains in total revenues in 2005 and 2006, but the growth in revenues was beginning to decelerate prior to the recession in three of the four states. Revenues shrank or grew modestly in 2007 and 2008. The precipitous drop in total state revenue is concentrated in 2009.

How do early revenue figures look for 2010? If we compare revenue for individual quarters, the growth rates of the 2010:Q1 figures over 2009:Q1 are still negative: Ohio −5.5 percent, Pennsylvania −3.9 percent, Kentucky −2.1 percent, and West Virginia −6.4 percent. These declines are less steep than the 2009 annual declines except in West Virginia. However, it is too early to declare that state revenue collections have turned the corner.

Falling state revenues are a concern because balanced-budget requirements force state lawmakers to choose between cutting expenditures or raising tax rates. Either of these can have the opposite impact of a fiscal stimulus and slow economic activity. States have been cutting expenditures, although the cuts have been partially mitigated by federal transfers through the American Recovery and Reinvestment Act and the use of the states’ own rainy day funds. The states of the Fourth District will continue to face challenges in balancing revenue and expenditures until more robust economic growth returns.