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States' tax revenue likely grew at beginning of year: report

WASHINGTON (Reuters) - U.S. states' tax revenue likely continued growing in the second quarter of 2013, according to preliminary estimates for January and February that were released on Wednesday.

The Rockefeller Institute of Government, an independent research group in Albany, New York, said revenue in 45 states grew 12.9 percent in January and February compared with the first two months of 2012. Personal income tax collections likely were up 23.6 percent and sales tax collections up 8.3 percent, according to the preliminary data.

Rockefeller warned, though, "March is the most important month in the quarter and these early results may not reflect the full quarter."

The $3.7 trillion U.S. municipal bond market is seeking signs that the surge in state revenue at the end of 2012 continued into this year. During and after the 2007-09 economic recession, states' revenue collapsed, forcing many states to enact emergency tax increases and spending cuts, while turning to the federal government for help.

For four years now revenue has been increasing and the final quarter of 2012 provided a hefty boost. Because tax cuts passed under former President George W. Bush were set to expire at the end of 2012, many taxpayers sold off investments or made other financial moves in the waning days of the year to avoid potentially steep tax bills in 2013. The burst of income buoyed states, as individual income taxes provide more than one-third of total tax revenue.

Last month the U.S. Census Bureau reported that tax revenue of states grew 4.9 percent to $193.9 billion in the final quarter of 2012 from the fourth quarter of 2011.

Rockefeller found the increase was even steeper - 5.2 percent - when it updated the Census figures with new data. The growth was almost exclusively due to personal income tax collections, which alone rose 10.8 percent.

Moreover, it found that when state tax revenue was adjusted for inflation it was higher than the pre-recession peak. For much of 2012, inflation-adjusted revenue remained below the highs reached at the end of 2007.

State tax revenue in the fourth quarter of 2012 was 8.9 percent higher than the fourth quarter of 2007, before the recession struck tax collections. When adjusted for inflation, though, the growth was a much slimmer 0.3 percent.

Still, Rockefeller said, current growth has been slower than prior recoveries from past recessions.

"State tax revenues are recovering, but not as quickly as the broader economy is improving. This reflects the fact that states do not tax the broad economy: their tax systems are much more reliant on narrower and more volatile forms of economic activity," according to the report.

States in the western part of the country saw the largest gains in the fourth quarter. In the Southwest region - Arizona, New Mexico, Oklahoma and Texas - revenue grew 9.2 percent. And in the Far West, which includes Alaska, California, Hawaii, Nevada, Oregon and Washington, it was up 8.8 percent.

Six states reported declines in total revenue from the fourth quarter of 2012: New Jersey, Michigan, Minnesota, South Dakota, Alabama and Wyoming.

(Reporting by Lisa Lambert; editing by Matthew Lewis)

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