Washington, DC, USA. States racing to cobble together new budgets for their July 1 deadline could find themselves sinking back into red ink sooner than expected, as Americans’ income and the taxes they pay on it shrink. Personal income taxes paid to the states 26 percent, or $28.8 billion, in the first four months of 2009, compared with the same period last year, reports the Nelson A. Rockefeller Institute of Government.

Arizona saw the steepest decline, a whopping 54.9 percent, followed by South Carolina, Michigan, California and Vermont, all by more than 30 percent. Only Utah, Alabama and North Dakota saw gains. Data were not available yet for Kentucky, Missouri, Mississippi and New Mexico.

The federal government found similar bleak news, with overall personal income falling in 37 states in the first quarter of 2009. Job losses, lower interest rates and smaller corporate dividend payments all helped to push personal income down, the U.S. Bureau of Economic Analysis said in a June 18 report.

The income tax collections filed in April were $18.2 billion lower than the previous April, due largely to the meltdown on Wall Street that cut deeply into stock market investments and bonus payments, according to Rockefeller, the public policy research arm of the State University of New York (SUNY).

Earlier this year, Rockefeller reported that state and local sales tax collections experienced their worst decline in 50 years. “The new bad news for elected officials can unsettle carefully balanced gap-closing plans already tentatively negotiated,” according to this week’s report.

The latest figures come at a time when about half of the states are still hammering out new budgets and a number of states are considering significant tax cut proposals to balance the ledgers:

• Arizona Gov. Jan Brewer (R) wants to combine a temporary 1-cent increase in the state sales tax with cuts in services to fill a $3 billion hole in the state budget.

• Illinois Gov. Pat Quinn (D) wants to increase the income tax by 50 percent to help close an estimated $11 billion gap.

• Pennsylvania's Gov. Ed Rendell (D) has ordered his cabinet to make an additional $500 million in cuts for the current fiscal year and has proposed a temporary 16.5 percent hike in the personal income-tax to plug a $3.2 billion shortfall.

• California Gov. Arnold Schwarzenegger (R) has called for plugging the state's $24 billion budget deficit by selling off the Los Angeles Memorial Coliseum, San Quentin State Prison and other state property, eliminating welfare for 500,000 families, terminating health coverage for nearly a million low-income children and closing 220 state parks.

At least five states, thus far this year, resorted to higher personal income and sales taxes, seven levied heftier cigarette taxes and at least 11 raised motor vehicle registration or court fees

All but four states begin their fiscal year July 1. The others are New York (April 1), Texas (Sept. 1) and Alabama and Michigan (Oct. 1).

With state sales and income tax revenues coming in well below expected levels, experts predict states could face more than $120 billion in shortfalls in fiscal 2010.

On average, personal income tax represents about one-third of annual state revenues, but makes up well over half of annual revenues in Colorado, Connecticut, Massachusetts, New York, Oregon and Virginia.

Alaska saw the largest drop in overall personal income at 3.2 percent, according to the BEA report. This reflected a “return to normal levels” of payments that residents receive from the Alaska Permanent Fund after getting a special $2,000 per person payment to residents in 2008. Set up in 1976, the fund shares a portion of the Alaska’s oil revenues with state residents.

But Alaska is among nine states without personal income tax collections. The others are Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.

Personal income fell by more than 1 percent in five other states, including North Dakota, Missouri and Iowa in the Plains region as sharply lower farm commodity prices reduced farm income, the government said.

In many states, one or two industries accounted for the bulk of the decline in earnings, BEA said: finance in New York, Connecticut, and Rhode Island; durable goods manufacturing in Michigan and Indiana; construction in Arizona and Nevada; mining in Wyoming and Oklahoma; and accommodation and food services in Nevada.

Stateline is a nonpartisan, nonprofit news service of the Pew Center on the States that provides daily reporting and analysis on trends in state policy. TS-Si thanks The Pew Charitable Trusts for its support and cooperation.

Stateline reports are prepared and published by TS-Si.org with permission. Signed articles do not necessarily convey an official position of TS-Si, its partners, or affiliates.

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