The 10 percent gain in state tax collections for 2011, reported yesterday by the U.S. Census Bureau, is being greeted as evidence that the economy and the fiscal shape of states are both improving substantially. But some context is needed. As the chart below shows, despite the gain, state tax revenues remain below their peak in 2008. That alone is sobering because costs have continued to rise, creating a mismatch between revenues and expenditures that has lasted so long it essentially has created a new fiscal reality for states in which none of their projections from a few years ago about how much money they'd be able to spend in the next decade now hold true.
There's more sobering news, however. This data is only for state taxes. It excludes local taxes that municipalities and school districts use primarily to support their operations. These are essentially property taxes, and the news on them is not good, because of the way house values have fallen. According to that data, property tax revenues declined in 2011 to $466 billion, down from $471 in 2009, the peak. Since many property owners pay taxes based on multi-year assessments that are still reflecting these new lower tax values, it's very likely that property taxes will rise only modestly, if at all in 2012. This means that local governments, which employ nearly three-quarters of all government workers in America, will continue to see plenty of fiscal stress.
States might be able to help by pumping some of their new revenue into municipal assistance, if they chose to. But they need to use some of this revenue to make up for stimulus money that's gone. And in some cases states' own costs are rising so fast, especially employee costs, that there isn't much money left over for more local aid. For instance, the Civic Federation of Chicago estimated earlier this year that Illinois' rising pension costs ate up two-thirds of the tax increase the state enacted in early 2011.
In short, the state and local fiscal squeeze appears far from over. Moreover, without a sustained stock market recovery, many states and localities also face even more rapid increases in retiree costs like those hitting Illinois right now. Los Angeles' chief administrative officer reported last week that the city is on the road to insolvency without substantial reform thanks to rapidly rising retiree costs and health care bills.