State tax collections dip, raising concerns about muni bonds

“Headline risk” associated with municipal bonds went up today when the U.S. Census Bureau released data that state government tax collections totaled $715.2 billion in fiscal year 2009. That’s a decrease of nearly $67 billion (8.6%) from fiscal 2008.
Those are scary numbers for skittish investors who fear municipal governments may have a hard time repaying their bonds.
“Obviously the biggest pressure it creates is it drives a lot of reporting and then you have headline risk,” said Matt Fabian, managing director at Municipal Market Advisors. “Headline risk is always a factor in the pricing of muni bonds, but it’s a major factor now with the huge number of stories ongoing about financial collapse.”
It could put further downward pressure on muni bond ratings, he said.
Investors, however, shouldn’t fret too much.
While their may be more muni bond downgrades to come, the bond rating agencies have made it very clear that they don’t expect municipalities to default on their bonds, Mr. Fabian said.
Looking at the fiscal 2009 data released today, however, it’s easy to see why some risk-averse investors may be wary of muni bonds.
State taxes on individual income were $245.9 billion, down 11.8%; general sales taxes were $228.1 billion, down 5.4%; and corporate net income taxes were $40.3 billion, down 20.7%. These taxes made up 71.9% of all state government tax collections nationally.
Severance taxes — imposed for the removal of natural resources such as oil, gas, coal, timber and fish — were down $4.8 billion in 2009, a 26.5% decrease from 2008. The largest decreases in severance taxes were seen in the South and the West.
The decline of revenue from mortgages, deeds or securities (documentary and stock transfer taxes) resulted in a $2.8 billion loss, a 36% decrease, with the largest decrease in the South.
States with the largest percentage decrease in revenue from individual income taxes were Arizona (42.5%), South Carolina (29.6%), Tennessee (23.8%) and New Mexico (23.2%).
States with the largest percent decrease in revenue from corporate net income tax were Michigan (63.5%), Oregon (45.8%), New Mexico (42.6%) and Utah (37.7%).