One Half of the Municipal Picture

By Annaly Capital Management

Lost in the headlines over the state of the expense side of municipal finances is the fact that tax revenues are rising at the state and local level.

The U.S. Census Bureau tracks the various line items of receipts for governments, and the news is that in the third quarter of 2010 on a year-over-year basis total tax receipts were up 5.2%, from $270.2 billion to $284.3 billion. As the graph below shows, clearly there is seasonality to these numbers, but municipal revenues in the third quarter 2010 are just below the record for any third quarter, set in 2008.

Total State And Local Government Tax Returns

To better understand the drivers of those tax revenue increases, let’s look at the line items. As the graph below shows, the proportions have been roughly constant in recent history. To be precise, here are the latest contributions of the various revenue sectors: Individual income taxes (21%), corporate net income taxes (3%), property taxes (32%), general sales receipts (25%) and other (18%), including tobacco product sales tax, alcoholic beverage sales tax and motor vehicle and operator’s licenses. Since 1988, individual income taxes have ranged from a low contribution of 16% (4Q09) to a high of 31% (2Q01), property taxes have ranged from a low contribution of 21% (2Q00) to a high of 49% (4Q09), and sales tax receipts have ranged from a low contribution of 19% (4Q09) to 28% (3Q06). Corporate tax receipts have never been above 8%.

Composition of State And Local Government Tax Revenues

Currently individual income taxes, property taxes and sales receipts account for 78% of all state and local government tax receipts. And guess what? According to the graph below, those three line items (as well as other tax receipts) are growing on a year-over-year basis. We wouldn’t want to jump to any conclusions based on a couple of quarters of data, particularly a couple of quarters of massive stimulus and monetary accommodation. Indeed, the other half of the municipal ledger—the expense side—still holds many significant challenges, but the revenue side of the municipal ledger, at least, is showing positive growth.

YOY Change in Components of State and Local Government Tax Receipts

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