WASHINGTON -- Last quarter saw beleaguered state budgets get their first small taste of an economic recovery in at least two years, according to a measure of state fiscal conditions just released by the Center for the Study of the States.

State revenues, excluding the effects of tax changes and inflation, rose 1.4% in the third quarter of 1992 over the same period a year ago. This is the first gain this number has posted since the center began calculating the figure in the fourth quarter of 1990, according to a report from the Albany-based center.

"Maybe [states] have turned the corner. This is the most positive sign we've seen in a long time," said Jennifer McCormick, research associate at the center and co-author of the report, which is based on a survey of all states except Alaska.

"It's definitely good news, but the important thing is [whether] it's a fluke or the beginning of a positive trend," she added.

State revenue, excluding legislated tax changes and adjustments for inflation, is an important indicator of the underlying fiscal condition of states, McCormick said.

The third quarter's 1.4% gain, following a 0.4% decline in the second quarter and a 2.2% drop in the first quarter, warrants only cautious optimism because of its size, McCormick said. It is also important to see if the number can stay positive during the next few quarters, she said.

State revenues excluding tax changes and inflation as an indicator have nonetheless steadily improved since the first quarter of last year when revenues were down 5.9% compared with a year earlier, McCormick said. "Every single quarter has gotten a little better since then," she said.

Not excluding any factors, state revenues were up 7.6% in the third quarter, compared with the same period last year, the center reported. This gain is down from the 8.9% increase in the second quarter and the 7.8% advance in the first quarter of this year.

Two offsetting forces explain why state revenue was up in the third quarter compared with last year, but not by as much as the two previous quarters, authors of the report concluded. "An improvement in the national economy helped to boost revenue, but most states' avoidance of legislated tax increases tended to slow down revenue growth," the report says.

Had states not enacted any tax increases, their revenues would have been up 4.3% in the third quarter compared with last year, according to the report. This gain resulted primarily from a 5.7% gain in revenues from personal income tax and a 5% jump in sales tax revenues, excluding tax increases.

Not excluding any factors, state revenue from personal income tax was up 9% in the third quarter compared with last year. The report noted this gain would have been only 7.6% without a new personal income tax in Connecticut that took effect last October.

Regionally, revenue growth in the third quarter was fairly uniform across the country, the report says. Six out of eight regions posted an increase between 4% and 5%, while the Rocky Mountain region had the largest gain, at 5.4%, and the Mid-Atlantic region had the weakest increase, at 2.7%.

It is difficult to predict how state revenues will perform in the current quarter and next year, the report says. "The big unknown is how the economy will perform. If it continues to limp along with slow growth, state revenue will continue to be weak. If the rate of economic growth accelerates, state revenue growth will also pick up," it report says.

State tax legislation next year is another factor difficult to predict, the report says. However, the report does predict large state tax increases next year compared to this year. "If next year is typical," the report says, "there will be considerably more tax increase activity than in 1992 for two reasons: the widespread state fiscal distress and the tendency for tax increases to occur in a year immediately following statewide elections.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.