State Tax Revenues Fall For Second Consecutive Quarter, Reports Rockefeller Institute

State tax revenues fell 1.7% in the second quarter of 2014 compared with the same period in 2013, according to preliminary data compiled by the Rockefeller Institute of Government based in Albany, N.Y. The decline follows a 0.3% drop in overall state revenues in the first quarter, the first consecutive declines since the recession hit in late 2008 and ’09.

Overall revenues were driven lower by sharp drops in collections of personal incomes taxes, which were down 7.1% in the quarter. The Institute has been predicting for more than two years that the income tax “bubble” created by wealthier Americans front-loading capital gains and dividends in anticipation of the so-called “fiscal cliff” in 2012 and early 2013 was not sustainable. This effect should play out through the third quarter this year and then evaporate.

State corporate incomes taxes also fell marginally in the second quarter, off 0.1% following a 1.4% gain in the first quarter. State sales taxes rose 4.2%, but the gain could not offset the declines from personal income taxes, which account for the majority of state revenues.

Among the states, the biggest declines in revenues came from Kansas and North Dakota, which cut income tax rates substantially last year. Of the 48 states for which preliminary data was available, 36 posted income tax declines in the quarter.

State and local tax revenues are an important source of funding for capital projects and operating funds for key noncommercial segments, such as schools, colleges, corrections and healthcare.