By Yali N’Diaye

WASHINGTON (MNI) – Fitch Ratings Monday said states’ tax revenues
are showing “signs of strength,” even beating expectations “in many
cases.”

And while the latest U.S. employment data for May disappointed
analysts and raised fears of an even more sluggish than expected
recovery, the improving trend at the state level in April could continue
in May, Fitch said.

Such developments can only be positive news as the fiscal year 2011
is ending at the end of the month for most states.

“Overall, states are meeting or exceeding budget estimates, so
there is upside for fiscal 2011 year-end results, which makes the
forecasts for the coming fiscal year more conservative given the higher
starting point,” Fitch said in a newsletter titled ‘U.S. Public Finance
Credit View – States.’

That said, the rating agency warned states to continue efforts to
structurally improve their budgets.

“Although this represents a welcome change of pace for states,
there is the risk that extra revenues will provide the temptation to
reverse some of the positive structural budgeting measures that states
have taken in the downturn,” Fitch said.

Not to mention that the revenue streams continue to depend on the
sustainability of the U.S. recovery.

“An unexpected interruption in the economic recovery would have a
direct effect on the states’ economically sensitive revenue streams and
create new gaps to be addressed in the coming year,” Fitch said.

For now, however, “tax revenue reports for states have shown
returns well above last year and, in many cases, meaningfully above
forecast,’ Fitch noted.

The strength is particularly evident for high-income states such as
Massachusetts, where income tax revenues rose 14% year-over-year through
May, compared with 9.4% for overall tax revenues.

Yet the improvement is also noticeable for taxes other than income.
Fitch gave the example of Texas, which has no income tax and recorded a
9.2% increase in sales tax revenue year-over-year through April.

Against this backdrop, “Many states are likely to see final fiscal
2011 tax revenue results that exceed expectations, allowing for or
increasing year-end operating surplus and leaving some upside for fiscal
2012 forecasts,” the authors also said.

They warned against reversing efforts to improve the states fiscal
positions, “particularly with the fiscal 2012 budgets, as the recent
revenue overperformance came as budgets were being finalized.”

They added that “backsliding in the economic recovery would have a
direct effect on the states’ economically sensitive revenue streams and
create new gaps to be addressed in the coming year.

** Market News International Washington Bureau: 202-371-2121 **

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