State tax revenue collapse threatens public construction

0 1002 Market Intelligence

State tax receipts fell 10.9% in the 3rd quarter from a year earlier, according to a summary report from the Rockefeller Institute of Government. This is the third consecutive double-digit year/year decline and is likely the deepest slide ever in tax revenues. While most states built very large budget reserves through 2006 or 2007, the long recession has either eliminated those reserves or cut them so low that they are only available for emergencies. Generally, construction funding is being cut sharply to minimize cuts in public services.

Contractors and suppliers looking for public construction work face market opportunities ranging from very good to miserable in 2010 depending on the location of the target projects and their funding sources. Funds for traditionally federally funded projects will increase assuming a third round of stimulus funding is enacted soon. Funds for traditionally state funded projects will decline. Funds for projects usually funded by local governments will be about stable but wide variation among local governments.

Further cuts in state tax revenue should be expected through next spring. Based on the 29% drop in estimated income tax payments in the first three quarters of 2009, annual tax payments next April could drop 30% or more from the previous year. This will keep state budget positions grim through the 2011 fiscal year ending eighteen months from now.

State revenue trends vary widely depending on the mix of taxes and industries in each state. Corporate income tax collections were 23% below the 3rd quarter of 2008. Collections have declined more than 50% in some states. Receipts from this tax will rebound quickly but there will be several m ore quarters of steep decline. Personal income tax receipts have fallen 12%. This is the average of a 5% drop in withholding receipts and a 29% drop in estimated tax payments on contingent, self-employed and investment income. The decline in usually large in state with very progressive income tax rate schedules. Sales tax receipts are down 9%. A large share of the drop is due to weak new vehicle sales which are already being partially reversed.

The change in state tax receipts from a year earlier ranges from 1.5% gains in New Hampshire and Rhode Island to a 40% collapse in New Mexico. Rhode Island has raised tax rates, New Hampshire does not have either a sales or income tax and New Mexico is suffering from an abrupt weakening of its ranching, energy and mining industries. Other states will above average tax declines include: OK (-26%), TX, WY and ND (-19%), UT and DE (-18%), IN (-17%) and Al (-16%). Most of these are energy dependent states where to recession arrived late so the cumulative revenue drop in this recession is not necessarily large.

By contrast, property tax receipts increased 3.4% from the 3rd quarter of 2008 to the 3rd quarter of 2009. Local governments that rely primarily on property taxes have a much better budget position than state governments and had had to make fewer cuts to schedules spending. Many larger local governments rely heavily enough on their own income and sales taxes or grants from state governments that they have to cut back nearly as deeply as state governments.

by Jim Haughey

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