Pew reports: State tax collections at a 10-year high but personal income growth lags

At the beginning of May, Pew Charitable Trusts issued a report revealing that by the end of 2017, 34 states, “the most yet,” were taking in more tax revenue than before the recession, accounting for inflation. The great recession started in December 2007.  The influx of revenues was in part because of a temporary spike in collections at the end of 2017, when some taxpayers accelerated state and local tax payments (SALT), before the Tax Cuts and Jobs Act eliminated the SALT deduction. Technically, the recession ended in June 2009. 

In the aggregate, at the end of 2017, states collected 9.1 percent more than in 2008, after adjusting for inflation and averaging across four quarters to smooth seasonal fluctuations.  That itself was an increase of 7.2 percent over the previous quarter, and “among the largest jumps in quarterly tax revenue since the economic recovery began.”  Said another way, “The 50 states combined had the equivalent of 9.1 cents more in purchasing power in the fourth quarter of 2017 for every $1 they collected at their peak in 2008.”

State variations

Pew observed that tax revenue recovery varied among the states. Collections in nine of those 34 states were more than 15 percent higher than the peak before or during the recession. On the other hand, in Alaska and Wyoming, two of the 16 states where tax collections were lower than the peak level, collections dropped by more than 15 percent.

The nine states with 15 percent plus tax revenue growth were:

1. North Dakota (31.6 percent) 
2. Oregon (24.8 percent)
3. Colorado (24.8 percent)
4. Minnesota (24.1 percent)
5. California (21.9 percent) 
6. Maryland (20.3 percent) 
7. Hawaii (20.2 percent) 
8. Nevada (18.9) 
9. South Dakota (18.6 percent)

Since the recession ended, North Dakota has lead tax revenue growth, largely due to robust oil prices.  In 2014, the Peace Garden State’s receipts were 124.5 percent above their recession-era peak. By the end of 2017, that figure had fallen, but was still high at 31.6 percent.

With respect to Oregon and Colorado, both have a constitutional cap on tax revenue growth. This means that if the trend continues for the remainder of this fiscal year, taxpayers may be due a refund.

Alaska was on the other end of the growth chart; its revenues were the furthest from their highest level, down 88.4 percent.  It is also highly dependent on oil prices, but in contrast to North Dakota, it has no general sales or personal income tax, and was hit disproportionately by the 2014 worldwide crude oil price decline. Wyoming was down 36.4 percent.

By tax type, the biggest increase was in personal income tax collections. As noted above, this is in part due to the shift in taxpayer behavior related to the elimination of the SALT deduction.  Pointing to Rockefeller Institute data, Pew recognized that other gains came from:

• Payments that hedge fund managers made on earnings required to be returned from offshore accounts by the end of last year;
• Robust stock market growth; and 
• Rising energy prices.

Pew acknowledged that “individual state results have differed dramatically depending on economic conditions, population changes, and tax policy choices since the recession.” For instance, North Dakota and Texas enacted tax cuts, whereas Louisiana and Washington increased taxes.  Citing the National Association of State Budget Officers, Pew asserted that in the past three fiscal years, more states have increased than decreased taxes, which is the opposite of what they did in fiscal years 2014 and 2015. 

Despite the good news for so many states with respect to tax revenues in particular, a return to peak revenue levels still could leave states with little wiggle room in the face of rising costs associated with growth in population and Medicaid enrollment, deferred needs, accumulated dates, and reductions in federal aid. 

Personal income growth lagging

A separate but related Pew analysis described personal income growth that has lagged its historical pace since the recession started. In 2009, personal income growth fell in almost all states. It did so again in 2013, “after taxpayers shifted income to avoid a potential federal tax hike. Again in a number of states, “[s]luggish growth in 2016 and 2017 reflected personal income drops.”

State governments care about personal income trends because economists use them to track broader economic patterns, and because they correlate with tax revenues and spending demands. Personal income consists of more than just employee wages; it also includes earnings from owning a business, property income, and employer or government provided benefits, such as Social Security and Medicare benefits.

According to the Pew analysis, between 2007, the onset of the recession, through the end of 2017, all three major components of personal income rose, but the factors that shaped personal income varied by state. For instance, in Mississippi, social Security benefits and property income equaled about nine-tenths of the growth, but only one-tenth of the growth in North Dakota. Not surprisingly, a state’s particular population growth, which has slowed over this time frame, also can affect a state’s aggregate personal income.

Here are some noteworthy personal income figures by state contained in the Pew analysis:

• North Dakota has enjoyed the fastest annualized growth (3.6 percent) since the start of the recession. However, the state’s personal income has trended down for about three years, hit by falling earnings from mining and farming.
• The next-fastest growth since late 2007 has been in Texas and Utah (each at 2.6 percent), and Colorado and Washington (each at 2.4 percent).
• Connecticut’s growth was the slowest of any state since the end of 2007, the equivalent of 0.6 percent a year.
• The next-slowest growth since the start of the recession has been in Illinois (0.7 percent); Mississippi and Missouri (each at 0.8 percent), and Alabama, Louisiana, Maine, New Mexico, Rhode Island, and West Virginia (each at 0.9 percent).
• As companies expanded, wages, salaries, and business owners’ income equaled almost half of U.S. personal income growth over the past decade, with the largest earnings contribution from the health care and social assistance industries. 
• Manufacturing was the leading industry detractor—residents’ earnings from this industry have dropped over the past decade—followed by farming. 
• Transfers such as Social Security and Medicare benefits represented about one-third of national personal income growth over the past decade, while property income, such as rent and dividends, made up about 17 percent. 

Finally, comparing the fourth quarter of 2017 with that from a year prior, adjusted for inflation, personal income grew by 2.1 percent, the fastest rate since the end of 2015, but still below a peak of 4.7 percent at the end of 2014. In 35 states, personal income growth over the year ending in the fourth quarter of 2017 was stronger than growth since the start of the recession.

States with the fastest growth were Nevada (4.5 percent), Arizona and New Hampshire (each at 3.7 percent), Idaho (3.5 percent), and Colorado (3.4 percent). Personal income fell in North Dakota (-2.3 percent) and Iowa (-1.2 percent), as farm earnings declined.

Pew cautions that these results are based on estimates and subject to revision.