States' Income Tax Revenue Plunges in Early 2009

State personal income tax collections dropped 26 percent nationwide through first four months of this year compared with a year ago, putting many states' already-shaky budgets into deeper trouble, a research institute reported.

The Nelson A. Rockefeller Institute of Government said 34 of 37 income tax-collecting states that submitted data for its latest monthly report experienced declines, with Arizona seeing the steepest drop.

State income tax collections in the first four months of the year fell about $28.8 billion compared with the same period in 2008, the institute said Thursday. April collections accounted for the bulk of the decline over the four-month period, due to the April 15 deadline for tax returns.

The falling revenue "will punch still deeper holes in the budgets of many states," according to the institute, an arm of the State University of New York that conducts research on state and local governments. "This increases the risk that state budget agreements for 2009-10 will not close budget gaps completely, and that states will need to make midyear budget cuts."

The Albany-based institute said the declines "also make it more likely that states will be forced to consider further spending and revenue actions in 2010, and will confront large budget gaps when federal stimulus assistance ends in 2011."

There are 41 states overall with a broad-based personal income tax.

Personal income taxes have been falling for several quarters amid a recession. Tax returns on 2008 income that were filed in April of this year show huge declines, likely due to market-driven deterioration in investment income and a dropoff in bonus payments, the institute said.

The state with the largest decline, Arizona, saw its personal income tax collections drop nearly 55 percent over the first four months of this year. The Nos. 2 and 3 states were South Carolina and Michigan, with declines of 38.6 percent and 34.4 percent, respectively. California, which is now confronting massive budget troubles, had the fourth-highest decline, at 33.8 percent.