State and local finances face continued challenges.


State and local government revenue from major taxes tracked by the U.S. Census Bureau declined by 0.5 percent in the second quarter of 2016, compared to a year earlier. This represents a substantial slowing from the 5 percent average growth for the four previous quarters.

Total state tax revenue from all sources declined by 2.1 percent, driven by declines in 2015 income tax returns, declines in estimated and final payments of income tax, and slowing growth in sales tax.

The just-released State Revenue Report from the Nelson A. Rockefeller Institute of Government provides detailed analysis of state government tax revenues in the second quarter of 2016 and provides preliminary data for the third quarter. The report also includes the latest revenue forecasts available from state governments. Finally, the report outlines potential behavioral responses by taxpayers in anticipation of post-election federal tax reform, and notes how these responses could affect state tax revenue.

Although oil-producing states were hardest-hit by slowing revenue growth in the second quarter, other states had declines as well, apparently driven by the weak stock market performance and associated declines in personal income tax collections.

Preliminary data for the third quarter of 2016 indicate weak growth in state tax revenue, at 1.2 percent. State tax revenue growth is likely to remain slow and highly uncertain throughout the remainder of fiscal 2017.

States are forecasting weak revenue growth for fiscal 2017, with only 4 percent growth in the income tax and 4.2 percent growth in the sales tax. States are likely to reduce their forecasts when they next update them.

States face yet another major new budgetary uncertainty for the 2017 fiscal year: the impact of federal tax reform, which may be enacted early in the new administration. According to the report: "States will need to worry about at least three kinds of effects, all of which are highly uncertain: 1) the impact of tax reform on the...

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