WASHINGTON - States registered their strongest revenue growth since before the recession in the first three months of this year, according to a report from the Center for the Study of the States.

The increase put many governors and legislators in the enviable position of being able to cut taxes and expand services in this election year, the report said.

"Many states are taking advantage of the improvement in their fiscal situation resulting from the revenue increases to enact tax reductions this year," said the quarterly report on states' fiscal health. "Most of those reductions will probably be relatively small in relation to total state tax collections."

Compared with same period a year earlier, state tax revenue in the first quarter grew by 6.7% before adjustment for inflation and by 4% in real terms, the report said. This is the strongest advance in inflation-adjusted receipts since the report was started in mid-1990, the report said.

The report is based on a survey of all states except Alaska, and pertains to states' personal income, sales, and corporate income taxes, which account for more than 70% of states' revenue.

"The growth of revenue appears especially impressive when it is recognized that California continued to pull down the national increase," the report said.

If figures for California are excluded, revenue for all the states would have grown 7.8% in the first quarter, rather than 6.7%, according to the report.

California had virtually no change in its first quarter revenue compared with the same period a year ago, the report said. But there were hints of future improvement. The state's revenues in January and February were relatively weak, but March receipts were notably stronger, rising 6.7% from the previous March, the report said.

Also the true picture of California's first quarter revenue may have been distorted by the Los Angeles earthquake in January because the report said that residents were allowed to deduct losses from their state income tax.

Meanwhile, the quake seemed to have little impact on sales tax revenue, the report said.

Across all regions, "revenue increases varied considerably," the report said.

The Southwest experienced the strongest gain in nominal revenue in the first quarter as receipts rose 11%. Meanwhile, the Far West registered the smallest gain: Revenue increased a slim 2.2% as California's dismal showing dragged down the region's average, the figures showed.

"Many of the states with the largest increases were in the West, led by Wyoming, Nevada, Oregon, New Mexico, Arizona, Idaho and Texas," the report said. "In general, states with relatively strong economies tended to have the largest increases. States not in the West with big revenue increases include Florida, Georgia, North Carolina, North Dakota, and Ohio."

The report also said that revenue changes in some of the smaller states were greatly influenced by one-time events.

"For example, Vermont reported a large increase despite having a weak economy because of a large estate tax payment. West Virginia's revenue fell because it had much lower collections from the estate tax and severance tax than a year earlier. Colorado's revenue was depressed by delays in processing income tax returns," the report said.

The report also said that the strongest job creation was seen in the Rocky Mountain, Southwest, and Southeastern regions, while the weakest was experienced in the Far West and Mid-Atlantic areas.

Nationally, revenues from all types of taxes addressed in this report were up solidly in the first quarter, figures showed. Not adjusted for inflation, personal income tax receipts were up 7.6%, sales tax revenues were up 6.9%, and corporate income tax receipts were 6.2% ahead of last year, according to the report.

In general, "this year is unfolding much like 1984," the report said. "A stronger economy is boosting state revenue, and many states are taking advantage of their healthier fiscal conditions to enact relatively modest tax reductions."

For most states, the quarter just ended was the third quarter of the current fiscal year. For the year to date, state revenues are up 6% in nominal terms compared to the first three quarters of the previous year, the report said.

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.