State revenue collection through the great recession.

• Author: Thompson, Michael F

The Great Recession of 2008 caused a major blow to the economic health of state and local governments across the United States--many of which lost substantial amounts of revenue and incurred additional debt to compensate for the lack of income and spending by their residents and companies. Some states are at least better able than others to collect general revenue from their own sources--through taxes and charges--to mitigate the effect of their broader deficits. Collecting funds from utilities is also another way states gain revenue, as well as insurance trust revenue, particularly for state employee retirement. Beyond revenue from their own sources, some states also rely on support from the federal government.

This article looks at all forms of revenue collected by state governments (including their local municipalities) but pays particular attention to general revenue from in-state sources.

Tax strategies among the states vary widely on the extent to which they collect funds from individual or corporate income taxes, general or focused sales taxes, or from property taxes at the local level. The strategies are often labeled "progressive" or "pro-business" by the burden they place on low-income workers relative to high-income workers and corporations. States also vary on the extent to which they charge fees for public services like education, medical care and highways--as well as for sewerage and the use of natural resources. Understanding the unique income patterns of states can inform the debate on how states can balance their revenue strategies for stable funding of services to avoid the risks of income shortfalls and debt during recessionary cycles. 1

In this article, state and local government revenue collection patterns are examined across the 50 states and the District of Columbia between 2005 and 2010 to take a preliminary look at what strategies may have allowed states to maintain revenue growth from their own sources. Data for the five fiscal years ending between 2006 and 2010 comes from the U.S. Census Bureau's Annual Surveys of State and Local Government Finances, which prepares more than 200 estimates of federal, state and local revenue sources--as well as expenditure, cash and debt--for every state.

Overall Revenue Including Utilities and Insurance Trusts

How badly did state revenue collection suffer through the economic recession? Figure 1 shows that states lost a staggering 31.7 percent of total revenue (nominal dollars) between the 2006-2007 fiscal year and the 2008-2009 fiscal year. However, Figure 1 also shows that the primary driver for such a decline is the fact that state governments borrowed extensively to obtain insurance revenues so that this value was actually negative by $487 billion in the 2008-2009 fiscal year. To partly compensate for the large state losses in revenue, the federal government increased its support to states over this period, particularly from the 2007-2008 fiscal year when it distributed $477 billion to the distribution of $623 billion in the 2009-2010 fiscal year (a 31% increase).

Obscured by the tremendous loss in overall revenues is the fact that states did not lose...