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White Paper 2011-7
June 8, 2011RISING STATE REVENUE REDUX
Reading about the resurgent tech sector in California and the turnaround in state tax revenues forces us to think about longer-term trends in the stability of state tax revenues. Even with the continuing high unemployment rates, tax revenues may become increasingly focused on the personal income tax. This will continue the destabilization of tax revenue over time.
A look at California
The April 2011 policy study by the California Budget Project on "Who Pays Taxes in California?"[1]
provides an interesting jumping off point for the discussion of state tax volatility. The primary point of the paper is that the lowest income families paid the highest proportion of their income as taxes. The bottom fifth, for example, paid 11.1% of the total, while the top 1% paid 7.8%. In spite of the political posture of the piece, the section on how California's tax policies have shifted over the decades is revealing. Of special note is the California Department of Finance’s estimate that the majority of General Fund revenues (51.5%) in 2010-11 will come from personal income taxes. Taken by itself this is not surprising. But in 1980-81, only 35.4% of General Fund revenues came from personal income tax receipts. So the current estimate suggests a powerful trend in tax policy.
There are a multiplicity of reasons for General Fund revenues becoming more dependent upon personal income tax receipts, but certainly the desire of the state to reverse trends in wealth concentration has been an important factor. The social goal, however, comes at a cost—the destabilization of state cash flows.
As income tax receipts rose in 2010, state tax collections began to increase quickly too. Comparing the tax revenues in a quarter to those of the same quarter a year ago, 2010 quarterly personal income tax receipts rose 3.1%, 1.2%, 5.3%, and 10.6%. The first quarter of 2011 topped the sequence off at a 12.4% increase.[2]
California is not alone
The increasing sensitivity of California's General Fund to individual taxes is a reflection of the broader sensitivity in state and local government revenues to personal income taxes. For the country, the percent of state and local tax revenues derived from the personal income tax rose quickly in the early 2000s with the tech boom. After increasing from 21% in 1998 to over 23% in 2001, the percentage of personal income to total income for state and local governments actually declined until 2007, when it stabilized at 22%.
See Chart 1.
Chart 1
Source: Census Bureau
[1] “Who Pays Taxes in California?” accessed June 6, 2011, http://www.cbp.org/pdfs/2011/110412_Who_Pays_Taxes.pdf.
[2] "States Report Strong Growth in Tax Revenues in the First Quarter of 2011," May 24, 2011 by Dadayan and Boyd. The Nelson A. Rockefeller Institute of Government. http://archive.constantcontact.com/fs091/1104610489644/archive/1105669516073.html.
Philip Fischer is the managing principal in eBooleant Consulting, LLC. He was formerly the head of Municipal Bond Research and the Global Index System for Bank of America Merrill Lynch. Comments can be sent to info@ebooleant.com.
Copyright 2011 eBooleant Consulting, LLC. All rights reserved.
Source: Census Bureau
Tech boom tech bust
The recovery in the economy, especially if it is fueled in part by a tech surge, is an important component in closing state and local budget gaps. Governments that rely on this increase in personal income taxes must also act to stabilize their revenues. This may require much larger rainy day funds or finding other sources of income.
Chart 4
Source: Census Bureau
Charts 3 and 4 make it clear that personal income tax receipts have become much more volatile during the last decades, and that the volatility of overall tax receipts is highly correlated with the volatility of personal income.
Chart 3
Source: Census Bureau
The volatility of the total revenues received is quite another story. Volatility rose steadily, except for recessionary periods. Chart 2 shows that by 2007 revenues were almost three times as volatile as they were in the early 1990s.
Chart 2
