04/19/2012 12:23 pm ET Updated Jun 19, 2012

State Tax Revenues Back To Pre-Recession Peak: Report

April 19 (Reuters) - U.S. state tax revenue has finally returned to its peaks before the recession and likely continued growing at the beginning of this year, according to a report released on Thursday.

States are currently finishing work on their fiscal 2013 budgets and many are eager for stronger revenue that will prevent more spending cuts.

Overall state tax revenue increased 3.6 percent in the final quarter of 2011 from the fourth quarter of 2010, according to the New York-based Rockefeller Institute, a think tank that closely watches state revenue.

Revenue was also 3 percent higher than in the last quarter of 2007 and 7.4 percent higher than in the fourth quarter of 2008, the group said, indicating a return to pre-recession peaks.

Although the recession began in late 2007, the effects on state revenues were delayed until the end of 2008. But the effects were dramatic as revenues dropped for five straight quarters from record highs to lows not seen in more than 20 years.

Because all states except Vermont must balance their budgets, they slashed spending, raised taxes, borrowed and turned to the federal government for help. States, caught off guard by the rapid decline in revenue, often had to call emergency budget sessions to make additional adjustments.

The recent improvements may persist in 2012.

"Overall collections in 45 early reporting states showed growth of 4 percent in the January-February months of 2012 compared to the same months of 2011," the Rockefeller Institute said.

But the encouraging revenue news comes with caveats.

"Collections in most states are now above previous peak levels, but in 17 states revenues were still lower in the final quarter of 2011 than four years earlier," it said.

Last month, the institute reported that revenue grew just 2.7 percent in 2011's final quarter from the fourth quarter of 2010, but then fine-tuned its estimates after the U.S. Census released fresh data.

The revised growth rate of 3.6 percent is still "considerably slower than what states experienced between the fall of 2010 and the fall of 2011," Rockefeller added.

Last year, states balanced their budgets almost exclusively through spending cuts. They slashed funds for healthcare, education and other areas that affect local governments. Many cities and counties are now caught in budgetary handcuffs because their chief revenue source, property taxes, also remains low.

"One important development has been a growing divide between state and local revenue trends," Rockefeller noted. "Services and functions that are largely funded by local governments, such as education and public safety, are likely to be under severe fiscal pressures for some time if current trends continue."

For the $3.7 trillion municipal bond market, the current struggle is raising fears about rising defaults.

In 2011, local taxes declined each quarter from 2010 levels by an average of 1 percent.

"Local property tax revenues grew by a modest 0.6 percent in the fourth quarter but declined in inflation-adjusted terms," the institute reported.