States have seen worst revenue drop in decades

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The state of Minnesota is not alone in its revenue problems, according to a new study from the Rockefeller Institute


“The first three quarters of 2009 were the worst on record for states in terms of the decline in overall state tax collections, as well as the change in personal income and sales tax collections,” it said. (For context, “worst on record” in this case means as far back as 1962, the first year studied.)


On average, the 50 states saw sales taxes drop 8.9 percent, personal income tax drop 11.8 percent and corporate income tax drop 22.6 percent, when comparing the third quarters of 2008 and 2009. The drop in Minnesota’s sales tax, personal income tax and corporate income tax revenue matched the national averages.


And those revenue shortfalls are expected to continue. Minnesota’s November forecast said the state has a new $1.2 billion deficit for the current biennium (FY 2010-11). About 70 percent of that shortfall came from a projected decline in income tax revenue.


So far, the American Recovery and Reinvestment Act has played a significant role in preventing deeper state budget cuts in Minnesota and elsewhere. Here, it provided $2.6 billion in direct aid to Minnesota’s general fund ($1.8 billion in increased Medicaid funding and another $800-plus million that primarily filled in for state funding reductions in K-12 and higher education.) Without that money, it is likely that more Minnesotans would have lost state-funded health care coverage and education would have had deeper cuts.


The Recovery Act money will run out soon. The Medicaid support goes through calendar year 2010, and Minnesota’s K-12 and higher education aid will be spent by the end of fiscal year, June 30, 2010.


Congress is currently considering proposals that would extend some of the Recovery Act provisions, including an extension of increased Medicaid funding to states. The Rockefeller report and analysis by the Center for Budget and Policy Priorities point to the need for additional federal state fiscal relief.


The economy is starting to turn the corner, according to the state of Minnesota’s November budget forecast. But the recovery will be quite slow and it hasn’t lifted the labor market yet.


According to the Center on Budget and Policy Priorities, many states will continue to have deficits in fiscal years 2011 and 2012. (Minnesota’s projected FY 2012-13 deficit is $6.6 billion, when inflation is included.) If the federal government does not provide more state fiscal relief, states will make painful service cuts to eliminate their FY 2011 deficits, likely dropping the Gross Domestic Product a full percentage point and costing another 900,000 jobs, the Center said.