Rockefeller Report: State Tax Revenue Dropped Dramatically in FY 2002

According to a May 2002 report from the Rockefeller Institute of Government, state tax revenue declined by 7.7 percent across all states in Fiscal Year 2002, which ran from July 1, 2001, through June 30, 2002. (The 7.7 percent figure is adjusted for changes to the tax code and inflation; without those adjustments, the decline was 5.6 percent, still the worst since the Rockefeller Institute began collecting state-tax-revenue data in 1991). The state taxes that dropped the most were the corporate income tax, which went down by 18.8 percent, and the personal income tax, which declined by 10.8 percent. The state tax that increased the most was the sales tax--in all but the four states that have no sales tax--which went up 0.6 percent.

The report, "A Bad Year: Fiscal Year 2002 Tax Revenue Summary," also notes that because of the sharp decline in corporate and personal income, the revenue hit was worst in the states that raise a significant amount of revenue from income taxes. Massachusetts, with a revenue decline of 14.6 percent from Fiscal Year 2001 to Fiscal Year 2002, California, with a decrease of 17.6 percent, and Oregon, with a 20.3 percent decline, were the three hardest-hit states overall. The situation in Oregon was exacerbated by the fact that Oregon, unlike, for example, nearby Washington, which is in other respects similarly situated, has no sales tax to offset the decline in income-tax revenue.

The plight of Oregon received national attention because of drastic measures undertaken to cut money from the school budget. After the state legislature failed to pass a statewide increase to offset a dramatically diminished general fund--$1.1 billion lower than the legislature and governor had predicted when they convened in January--districts were faced with closing schools over two weeks early. Teachers in Portland agreed to work for two weeks for free, and the county still had to pass the state's first-ever county income tax to keep the schools open. The situation in Portland was lampooned by nationally syndicated cartoonist Gary Trudeau in his comic strip Doonesbury from May 12-May 17, 2003, and the national media picked up the story from Trudeau.

Ten cities and counties voted on tax increases on May 20, but only four approved them. On May 23, the suburb of Hillsboro became the first of over 80 districts to close its school for the summer--three weeks early. Jeff Thompson, an economist and policy analyst with the Oregon Center for Public Policy, announced on May 15 that unless the state of Oregon increases its tax burden, revenues will not return to the 1999-01 biennium level until after the 2007-2009 budget cycle. "The forecast makes clear that Oregon will be stuck in Doonesbury for many years" if the state doesn't do something, Thompson added.

The Rockefeller report's author, fiscal analyst Nick Jenny, says that his preliminary numbers on Fiscal Year 2003 indicate flat state revenue, although final numbers will not be available for months. States are counting on an upturn in the economy to raise their revenue for Fiscal Year 2004, Jenny adds. There is little indication that states have contingency plans that take into account the possibility that the economy may not rebound by then.

Prepared May 29, 2003