State Tax Revenues

Let’s take a look at state tax revenues for a few states to see if we can spot potential problems down the road. This is not an all-inclusive list of states, but a representative sample of what potentially lurks ahead.

State Samples

  • California
  • Georgia
  • Florida
  • Michigan
  • Massachusetts
  • Illinois

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“Someday, this era may simply be known as The Google Years. California, whose budget revenue slides up and down like a yo-yo with changes in capital gains and stock options, is once again counting on outsized income tax filings from a handful of tech executives to help balance its budget.

“For this wave, California can largely thank Google Inc.

“After cashing in more than 9 million shares valued at $3.7 billion last year, 16 Google insiders will owe the Golden State as much as $380 million in taxes — enough to cover the salaries of more than 3,000 state workers.

“Taxes paid by Google founders Sergey Brin and Larry Page account for nearly half the amount. There is virtually no way for them or other California billionaires to escape a 9.3% state capital gains tax or a recent voter-approved 1% tax on the wealthy to underwrite the state’s mental health programs.

“‘On behalf of a grateful state, I’ll be happy to wash their windows or mow their lawn,’ said H.D. Palmer, spokesman for California’s Department of Finance…

“Mega-sized tax filings from Google executives began flowing into state coffers in earnest in 2006, two years after the company went public. The receipts helped fuel a multibillion-dollar tax windfall last spring that allowed Gov. Arnold Schwarzenegger to pour money into roads, classrooms, and other popular programs, pleasing political enemies and helping smooth his path to re-election.

“Schwarzenegger’s good fortune, it turns out, did not end there.

“As Google’s stock topped $500 in 2006, company executives continued to sell hundreds of thousands of shares each month, according to an analysis of insider transaction data provided to The Associated Press by research firm Thomson Financial…

“Although the company is helping push capital gains revenue above historical averages, state finance experts say they are not overly concerned that the latest tech boost is another bubble ready to burst and wreak havoc with the state budget.

“According to the state’s latest figures, capital gains and stock options accounted for nearly 14 cents of every tax dollar collected in California in the fiscal year that ended last summer. Similar numbers are expected this year. That’s nearly double the percentage two years ago, following the dot-com bust…

“‘I admit, I’ve been looking at those insider trading sheets almost daily. It’s amazing; day after day, millions and millions of shares,’ said Brad Williams, senior fiscal forecaster for the state’s nonpartisan Legislative Analyst’s Office. ‘It’s not all attributable to one company, but Google is a big sign that we’re going to see capital gains again this year and that the budget won’t be as bad as it could be.'”

Two Questions

Ah, yes, The Google Years. Not to spoil the party, but I have two questions:

  1. Is this sustainable?
  2. California is in great shape, right?

Let’s leave the first question for the optimists. But with all of this money pouring in, California must be in great shape, right?

In an attempt to answer the second question, please consider the San Francisco Gate article “California Short $1 Billion in Tax Revenue, Controller Says”:

“Personal income tax receipts coming into the state in January fell $1.3 billion below Gov. Arnold Schwarzenegger’s revenue estimates in the spending plan he released last month, the state controller said Tuesday.

“The lower-than-expected revenue raises questions about whether Schwarzenegger will reach his stated goal of eliminating the state’s net operating deficit in the budget year beginning in July.

“The governor’s proposed 2007-2008 budget assumes tax revenue in the current budget year would grow by $1.1 billion, or 1%. In the coming fiscal year, Schwarzenegger also assumed a $6.8 billion boost, or 7% increase.

“‘Tax payments are down about $1 billion, and we don’t yet have the source of that decrease,’ said Controller John Chiang, holding a news conference at the state’s tax-collection center, where 2006 tax returns have begun to trickle in.

“Chiang speculated that the state’s slumping housing market might be a cause of the revenue decline. He also said revenue other than personal income tax rose in January, leaving the state short about $710 million for the month…

“During a press conference touting his plan to overhaul health care in California, Schwarzenegger on Tuesday dismissed news of January’s lower tax receipts. He said it would not affect his policy ambitions on health care reform.

“‘Revenues go up and down,’ he said. ‘I am very optimistic. Our economy is doing well and businesses are doing well, so I am very optimistic’…

“In addition to the uncertain tax revenue, Schwarzenegger’s $143.2 billion budget relies on other risky revenue assumptions, analysts say.

“The governor’s budget assumes increases in property tax revenue and higher income from a rebounding housing market in the second half of 2007.

“It bets that the legislature will immediately approve gambling compacts that it refused to pass last year, bringing more than $500 million in projected revenue to the state.

“Schwarzenegger also assumed the state will win appeals in two court cases that it already has lost at the superior court level. Those two cases could take another $1.1 billion out of the governor’s balanced-budget equation if the state does not prevail.”

Schwarzenegger Rolls the Dice On

  • Improved gambling revenue
  • Rising property taxes
  • Continuation of Google income
  • Winning 2 appeals cases it has lost twice
  • Increasing payroll tax revenue
  • Higher income from rebounding real estate market.

Bear in mind that Schwarzenegger needs that lotto parlay just to break even with projections. Like all gamblers betting with someone else’s money, Schwarzenegger had this to say: ‘I am very optimistic. Our economy is doing well and businesses are doing well, so I am very optimistic.’


The Atlanta Journal-Constitution is reporting, “Revenue Drop May Hit Budget”:

“Georgia’s disappointing tax collections over the past six months have some lawmakers worried that the state may not raise enough money to pay for Gov. Sonny Perdue’s proposed $20.2 billion budget.

“Perdue is requesting a more than 8% increase in spending, from $18.6 billion this year to $20.2 billion for fiscal 2008, which begins July 1. Part of that increase will be funded with surplus money raised last year. And administration budget officials say the state should take in enough to meet the governor’s spending plan. However, most members of the General Assembly recall 2003 and 2004, when they had to slash spending, raise cigarette taxes, and gut the state’s rainy day fund to make ends meet.

“‘They worry an economic slowdown will force them to cut spending again if tax collections don’t improve. You’ve always got a concern in the back of your mind — this year more than others — about whether we are basing this [budget] on good numbers,’ said House Appropriations Chairman Ben Harbin (R-Evans).

“Sen. George Hooks (D-Americus), longtime former Senate Appropriations chairman, said, ‘Obviously, the governor and his economist are banking on a tremendously aggressive, strong economy. Indicators now are that the economy is not growing that strong.’

“Lawmakers who run the legislature’s appropriations committees closely watch revenue collection reports. And they have noticed the slower growth — particularly in the net sales tax take.

“Most of the state’s revenue comes from income and sales taxes, both of which are an indicator of the strength, or weakness, of the economy. ‘It’s just strange we haven’t had a good month [of collections] since July,’ said Senate Appropriations Chairman Jack Hill (R-Reidsville).

“Shelley Nickel, director of the Office of Planning and Budget, said she thinks Perdue’s estimate of how much money the state will collect during the upcoming year is ‘still fairly conservative.’

“However, Alan Essig, executive director of the Atlanta-based Georgia Budget and Policy Institute and a former state budget analyst, isn’t so sure. ‘It seems to me they [Perdue officials] are forecasting a better economy than what we have today,’ Essig said. ‘It seems very optimistic to me.’

“‘It’s just strange we haven’t had a good month [of collections] since July,’ said Senate Appropriations Chairman Jack Hill.”

No, that’s not what is strange. What is strange is that few see the recession that is staring them smack in the face. On the other hand, Alan Essig, unlike Schwarzenegger, is not clueless: “It seems to me they are forecasting a better economy than what we have today. It seems very optimistic to me.”


The (Illinois) News Gazette is asking, “With Healthy Revenue, Why Is State Looking at Tax Increases?”:

“There are some interesting numbers in the latest report from the Illinois Commission on Government Forecasting and Accountability. The bottom line is that the state’s revenue numbers are very healthy, and that Illinois doesn’t look like a state with financial troubles.

“But government receipts unfortunately tell only part of the story. The other side of the ledger apparently is so bad that all sorts of fundraising schemes — an income tax increase, expanding the sales tax to include services, a gross receipts tax, selling the state lottery, selling the Illinois Tollway, and expanding legalized gambling — are being discussed by state lawmakers. Illinois’ biggest financial problem, as it has been for years, isn’t the result of meager revenue, but aggressive spending.

“Personal income tax collections are up 8.2%, corporate income tax revenue has grown 18.3%, sales taxes are up 4.2%, and public utility tax revenue is up 6.6%. Overall state revenue, even including a steep 12% drop in state lottery sales, is up 7.1%. In other states, governors would rejoice at economic growth like that. But in Illinois, that isn’t enough to overcome discussion of more tax increases or asset sales.

“Before lawmakers get ahead of themselves this spring with heated debate about revenue enhancements, they should stop to consider the effect that their overspending and their indifference to responsible fiscal management has had on the state’s financial condition. The reason Illinois’ budget is billions of dollars in the red can’t be blamed on weak revenue. Instead, it’s the fault of weak-willed political leaders who haven’t been able to spend within the state’s means.”

Illinois seems to be firing on all four cylinders, yet it still does not have its financial act together.

Illinois Proposals

  • Raise income taxes
  • Sell the state lottery
  • Sell the Illinois Tollway
  • Expand legalized gambling.

Is Illinois in any shape for a downturn if it needs to do those things when personal income tax collections are up 8.2%, corporate income tax revenue is up 18.3%, sales taxes are up 4.2% and public utility tax revenue is up 6.6%? Let’s face it, Illinois is a basket case, just as is California, if it cannot make ends meet with those windfalls.


The South Bend Tribune is reporting, “Michigan Taxpayers Have Seen State Tax Bills Drop.” That seems like great news, but let’s look at the fine print:

“Shrinking tax revenue also has made it more difficult to balance the state budget. A shortfall of around $800 million exists this year, and the deficit in next year’s budget could be $1 billion or more.

“In the previous four years, the state wrestled with more than $4 billion in shortfalls. Tax cuts passed beginning in 2000 — including cuts in the single business tax, which expires at the end of the year — have chopped state revenue by $1.4 billion a year, according to state Treasurer Robert Kleine.”

Michigan is losing jobs, home prices are sinking, foreclosures are rising, and the state has a huge budget deficit. This is not exactly a pretty picture.


The St. Petersburg Times is reporting, “People Are Screaming for Relief”:

“Gov. Charlie Crist on Tuesday called for sweeping property tax reductions, seeking to deliver quickly on a second campaign promise and setting the stage for a fight with cities, counties, and school districts…

“At city and county halls across Florida, Crist’s call for widespread property tax cuts got an icy reception.

“‘Maybe he hasn’t thought this through,’ said Tampa City Council member Linda Saul-Sena.

“She said Crist’s proposal essentially caps local government revenue growth at 3% a year at a time when cities and counties are facing increasing pressures to provide services while grappling themselves with rising costs of insurance, health care, gasoline, and other essentials.

“‘I don’t see how we’re going to provide the basic services that our citizens expect,’ Saul-Sena said…

“Clearwater Mayor Frank Hibbard said he wanted to fully realize the long-term ramifications of major property tax law changes. He said the inequities that now exist in the Save Our Homes law were not evident when it was enacted 15 years ago.

“Hillsborough County Property Appraiser Rob Turner said he feared that cities and counties would simply raise their tax rates to offset the lost revenue.”

People are screaming for relief, huh? So the proposal is to just keep spending while cutting taxes? Sorry, only the federal government has the right to magic tricks like that. Florida, you have to decide to cut spending or raise taxes. Which is it? Then again, you can do what Schwarzenegger has done and mortgage the next umpteen years worth of revenue into state bonds while rolling the dice on an improving economy.

What I find most interesting is the Save Our Homes law seems to be backfiring. This, of course, is more proof that government programs over the long haul do exactly the opposite as intended.

Save Our Homes

Please consider this special report on Save Our Homes:

  • “The Save Our Homes constitutional amendment doles out its benefits unevenly. Even among neighbors, the difference in annual taxes can be thousands of dollars”
  • “The program that was supposed to save little old ladies from being forced from their homes has turned into a cash cow largely for the rich”
  • “New owners in modest neighborhoods often pay the same tax bill as millionaire homeowners near the beach”
  • “Some Florida property appraisers say illegitimate and fraudulent homesteading are among the largest problems they face, resulting in tens of millions of lost tax dollars every year.”


The Boston Globe is reporting, “Lottery Revenue Drop Worries Officials”:

“The Massachusetts State Lottery, after years of increasing sales of scratch tickets and other games, is experiencing a substantial decline in revenue, setting off deep concern on Beacon Hill.

“According to figures filed with the governor’s office, revenues fell $71 million, or 3.8%, during the first five months of the fiscal year.

“State Treasurer Timothy P. Cahill is expected to brief legislative leaders today on the most recent sales figures.

“But some lawmakers already worry that Massachusetts residents are too tapped out by fluctuating gas prices to continue their regular lottery habit.

“The state lottery has been one of the most successful in the nation and has generated billions of dollars for cities and towns. Municipal officials are especially alarmed by the revenue decline.

“‘This is critical funding,’ said Sen. Karen E. Spilka, a Democrat who represents Framingham, Natick, and five other towns. ‘My communities are hurting…I don’t want there to be a deficit and then for us to have to tell our cities and towns the funding isn’t there.’

“Through November, sales were down for all lottery games except Keno, which was up 3.5% from the same time last year. The sharpest decline was in MegaMillions sales, which were off 47.7%. A former official attributed the decline to smaller jackpots; last year, there were three $100 million prizes…

“If lottery revenues don’t rebound, it will make it even more difficult for Gov. Deval Patrick to close an estimated $1 billion deficit in the next fiscal year’s budget. Yesterday, Patrick asked each of his agencies to identify 5-10% in savings within their budgets.

“Communities are already counting on this year’s lottery aid; it’s unclear whether the state would have to make up any shortfall.

“‘The lottery right now is extraordinarily important to cities and towns,’ said Geoffrey Beckwith, executive director of the Massachusetts Municipal Association, which represents communities across the state. ‘We’re hoping that the lottery sales rebound. It’s something we’re watching very closely.

“But he said communities shouldn’t assume the lottery will continue to grow indefinitely…

“Michael Widmer, president of the Massachusetts Taxpayers Foundation, called declining lottery sales ‘a serious short- and long-term problem facing the state and cities and towns.’

“‘To have this major source decline after years and years of growth adds further to the dilemma facing the state’s political leaders,’ he said. ‘I’ve looked at the numbers, and the shortfall has been steady month to month. Every month, I’ve seen a shortfall.'”

Lottery Summation

  • Massachusetts residents are hit too hard by gas prices to continue their regular lottery habit
  • If lottery revenues don’t rebound, it will make it even more difficult for Massachusetts to close an estimated $1 billion deficit in the next fiscal year’s budget
  • The lottery right now is very important to Massachusetts cities and towns
  • Illinois is considering selling its state lottery.

Lottery playing is perhaps another significant shift in psychology. The masses simply can no longer afford to waste even a few bucks a week on dreams of a big payoff. This is coming at a time when cash-strapped cities and states are struggling to meet budgets and are dependent on that revenue.

Meanwhile, rising property taxes have people screaming for relief in Florida, a state whose property values, ironically enough, are crashing. And California is banking on an entire series of unlikely events, including rising property taxes, gambling revenue, and a recovering real estate market.

Are there any states in the country remotely prepared for a recession hitting this year? If so, which ones? When the recession does hit, states are going to have to choose between two very painful options: raising taxes or cutting services. The former will have people screaming, and the latter will throw more people out of work. Either way is going to be painful. We are in for some very rocky times ahead.

Mike Shedlock ~ “Mish”

February 20, 2007

The Daily Reckoning