State, Local Tax Revenues Decline 7%

By CONOR DOUGHERTY

State and local tax revenues fell 7% in the third quarter of 2009 from a year ago, the Census Bureau said in a report underscoring how the economic downturn is stressing government collections.

Sales taxes declined 9% to $70 billion in the third quarter compared with the year-ago period, the Census Bureau said. Income taxes plunged 12% to about $58 billion. Together, sales and income taxes make up roughly half of state and local tax revenue.

"We expect continued weakness well into 2010 if not further," said Lucy Dadayan, an analyst at the Rockefeller Institute of Government at the State University of New York.

Property taxes increased 3.6% in the third quarter compared with a year ago. But as property assessments catch up with falling residential and commercial real-estate values, property-tax revenues are expected to be weak. That will have a particularly severe impact on local governments, which fund much of their operations from property taxes.

"At minimum, cities will be working through the catastrophic drops in revenue for the next 18 months to two years," said Mark Muro of the Brookings Institution's Metropolitan Policy Program.

State and local tax revenues tend to lag behind the downturns as well as the upturns in the economy because of the time it takes for collections to catch up with depressed store sales and diminished incomes. The third quarter was the fourth consecutive quarter in which tax collections were below year-ago levels. Through the first three quarters of 2009 state and local tax revenues totaled $875 billion, nearly 8% below the $951 billion collected in the first three quarters of 2008. In the same period, federal receipts were down nearly 19%.

While the recession appears to have ended during the summer, government revenues are expected to continue to be weak. State and local governments employ 15% of American workers outside of agriculture.

Twenty-two states -- including Connecticut, Illinois and Oregon -- saw third-quarter revenues decline more than 10%. Alaska saw the biggest percentage decrease in revenues -- 65% -- a decline that reflects falling energy prices. Several other energy-heavy states saw big decreases in tax revenue: Wyoming, Texas and Oklahoma saw overall tax revenues decline between 19% and 26%. Only three states -- Nevada, New Hampshire and Rhode Island -- saw quarterly increases.

With tax revenues continuing to fall, several states are grappling to plug budget holes. Unlike the federal government, most states are required to balance their budgets.

State and local quarterly revenues, which vary considerably by the time of year because of the tax calendar, peaked at $359.1 billion in the fourth quarter of 2007; the fourth quarter usually brings the biggest collections. Total third-quarter 2009 receipts were $266.5 billion.

Write to Conor Dougherty at conor.dougherty@wsj.com