Trump tax cuts help state revenues rebound

Trump tax cuts help state revenues rebound
© Greg Nash

State governments are collecting more in tax revenues than their pre-recession peak, thanks to both a booming economy and the 2017 Republican tax cuts, according to a new report. 

Forty-one states are now bringing in more revenue than their pre-recession highs, according to data from the Pew Charitable Trust’s Fiscal 50 project. All told, the states collectively brought in 13 percent more revenue in the third quarter of 2018 than they did during the pre-recession peak.

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Most of the nine states that have yet to rebound are energy-producing states that have seen revenues drop as global commodity prices fall.

The stretch of revenue growth is one of the strongest in recent memory, said Justin Theal, a researcher at the Pew Charitable Trusts who co-authored the report. 

The run of positive news began in 2017, when taxpayers raced to get their money to state and federal governments before the tax reform overhaul took effect. 

It has continued, albeit at a slower pace of growth, because of a surging stock market, low unemployment and growing wages. Personal income tax receipts rose by more than 5 percent in the last four quarters, a sign of the strong labor market and wage growth. 

But, Theal added, at least 19 states still fell short of revenue forecasts in the last year, a sign that the good times will not last forever.

“The surge shows signs of fading. Growth over the last 4 quarters has been slowing,” Theal said. 

There are other signs that state tax revenue growth is beginning to ebb.

Lucy Dadayan, a senior research associate at the Urban Institute, said in a report last month that sales tax grown has been slower than in previous recoveries. Local property tax growth slumped at the beginning of 2018.

Several states are likely to see their tax revenues dip in the coming months as new tax reforms take effect. About a dozen states passed what are called conformity bills, bringing their state tax codes in line with the new federal reforms. Those laws return some of the unexpected windfalls that states receive to the taxpayer.

North Dakota has experienced the most robust recovery, one that began even as the rest of the nation was mired in the grips of the worst recession in modern history. Today, its tax revenues are more than double their pre-recession high, fueled by the fracking industry, which took off just as the recession hit the rest of the country.

Fifteen other states have seen their tax revenues grow to at least 15 percent higher than pre-recession levels, including blue states like Oregon, Washington and California, and red states like Kansas, Tennessee and South Dakota.

Alaska, which is dependent on taxes paid by oil companies, has been the hardest hit.

Its state revenues are still more than 80 percent below the pre-recession peak as those companies back off costlier forms of exploration and extraction because of the lower price of oil. Wyoming, another extraction-heavy state, is 37 percent below its previous revenue peak.

New Jersey, Mississippi, Ohio, Florida and three more drilling-dependent states — Louisiana, Oklahoma and New Mexico — have yet to rebound to pre-recession levels.

Even with the higher revenues, Theal said, state budgets are still being squeezed by increased Medicaid expenses and debts and liabilities incurred during the recession.

“They still face these budget challenges even in the face of these higher revenues,” he said.