NCPA - National Center for Policy Analysis

Federal And State Revenues Hit As Markets Drop

April 4, 2001

The recent decline in stock values has had an impact not only on individual investors, but on federal and state revenues as well. While federal finances aren't expected to go back into deficits, the size of the projected budget surplus is coming into question.

The ups and downs of the stock markets affect federal and state revenues in a number of ways.

  • When high-tech employees were rewarded with stock options in the booming 1990s, their incomes increased -- and so did federal and state income taxes.
  • Gains in the market encouraged people to spend -- and drove up sales-tax revenues in many states.
  • Higher real estate prices drove up property tax revenues.
  • Capital gains on stocks -- which are owed even if the stocks aren't sold -- pushed up income tax revenues.

But with the current decline in stocks, the whole process becomes one of declining revenue realizations.

Chief economist Mark Zandi of says the recent decline in equity markets is a serious threat to the fiscal health of all levels of government.

  • Federal taxes on realized capital gains have risen $70 billion just since 1994 -- and about 15 percent of the swing from a 1994 federal budget deficit of $200 billion to a 2000 surplus of $225 billion was due solely surging capital gains revenue, Zandi says.
  • He projects that taxable realizations will fall by a third this year to $375 billion -- and to $320 billion in 2002, even if the stock market picks up.
  • The S&P 500 closed Tuesday at 1,106.44, but if it falls to 1,000, realizations will plummet to $320 billion this year, says Zandi -- and to $170 billion in 2002.

States such as California, New York and Connecticut saw the biggest gains in tax realizations in the boom years. Now they will see the biggest declines, Zandi predicts.

Source: Charles Oliver, "Bear Starts to Maul State Coffers; Market Drop Affecting Revenues," Investor's Business Daily, April 4, 2001.


Browse more articles on Tax and Spending Issues