The U.S. economy has been slowly climbing out of the effects of the Great Recession, but new milestones suggest that we are finally turning the corner toward full recovery. A recent study by The Pew Charitable Trusts noted one such milestone. In a majority of states, inflation-adjusted state tax revenues have topped pre-recession levels.
Using the third quarter of 2008 as the pre-recession benchmark, 29 states reached their pre-recession tax levels by the second quarter of 2015. Collectively, all fifty states brought in 5.6% more in tax revenue (after inflation and seasonal adjustments) relative to Q3 2008. However, there is still a wide variance in the recovery among states.
State variations are partially due to the spotty nature of the economic recovery and partially because of tax policies that vary greatly between the states. For example, Ohio and Kansas cut taxes during the recession — thus it should come as no surprise that both states have yet to reach their pre-recession peaks.
A cluster of northern states (North Dakota, Minnesota, Iowa, and Illinois) along with Colorado, have seen tax incomes rise to greater than 20% above their peak. North Dakota more than doubled its peak revenue because of the fracking-based oil boom that has taken place since 2008. Expect North Dakota to settle in with the rest of the pack in improvement levels, since over the last two quarters revenues have fallen along with crude oil prices.
Oil is behind both of the extreme outliers, North Dakota and Alaska. Alaska’s tax receipts are down 91.8% from their 2008 peak values. The peak values are a particularly high bar to reach because of the 2008 confluence of record-high crude oil prices and the introduction of a new oil tax. Alaska has no personal income tax for revenue generation, so the drop in oil prices has taken a much greater toll on state coffers.
Two other states are still 15% or more below their pre-recession tax intake levels: Florida at 17.7% below peak and Wyoming at 23.6% below peak.
By the state tax revenue measure, the U.S. economic recovery had stalled after a rise in the second quarter of 2013 to 23 states reaching pre-recession tax income levels. Since then, every quarter had come in between nineteen and 24 states above the recession peak until the Q2 2015 reading. At the same number of quarters past the 2001 recession, only Michigan had tax collections that were below the pre-recession peak — but in fairness, the 2001 recession was not as severe in terms of time or money.
Can State Tax Revenue Cover Increased Expenses?
The balance between thriving and struggling states has left today’s collective purchasing power of the states at around six cents more per dollar of tax revenue than before the recession. That is not enough to support fully the approximately twelve million people added to America’s population since the recession, and definitely not enough to handle increased expenses like state Medicaid expansions.
If that is too pessimistic a view for you, put on your rose-colored glasses and consider that without adjusting for inflation, the revenue across all fifty states was 16.8% above peak value and only four states had not yet recovered to pre-recession tax income levels: Alaska, Louisiana, Wyoming, and Florida.
We may still have a long way to go toward full recovery and robust economic growth, but the Pew report represents an important milestone along that path. Perhaps 2016 will be the year when all fifty states finally break the barrier and reach full recovery.
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