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Here’s what we mean.
Consider this a good news, bad news story. Collectively, the states have recovered the tax revenue they lost since the last recession. But, when the focus shifts to individual states, 26 states (excluding Connecticut) are still struggling to make up the lost ground, the Pew Charitable Trust reports. Okay, that’s bad news for the other states, but Connecticut made the cut, right? Yes, as of 2013’s last quarter, Connecticut was about 3.5% above its 2007 pre-recession level.
But here comes the qualifier:
“…recovery to peak levels does not necessarily signal an economic comeback, because growth can result from tax or policy changes. More than half of the states taking in more tax dollars than at their inflation-adjusted peak increased taxes since the recession,” Pew found.
This observation suggests that tax revenue can grow in several ways. Clearly, it can grow when states increase tax rates, which is what Illinois did in 2011. But revenue can also grow when economic activity increases, which is what happened in North Dakota, thanks to an oil boom.
Economic activity usually spikes when businesses invest in cost-cutting technology. But, “business investment fell almost 25 per cent during the recession and hasn’t come back the way many economists had expected, especially given that low interest rates make borrowing less expense,” Bloomberg Businessweek’s Matthew Phillips and Peter Coy reported.
Well, maybe businesses are strapped for cash, but that doesn’t seem to be the case. “Cash on corporate balance sheets has increased almost 70 percent over the past four years to more than $2 trillion, the size of Russia’s economy. Profits are high, and employee compensation as a percentage of GDP fell to a 65-year low last year.”
If businesses have the cash, then why aren’t they buying new machines? Phillips and Coy gave two reasons: (1) repeal of a maximum $500,000 federal tax break for new machinery and equipment purchases and (2) Wall Street’s recent practice of rewarding businesses that forgo capital investments.
Citing Morgan Stanley research, the authors found, “companies that haven’t spent on new equipment have outperformed those that have spent for most of the recovery.” But that could be changing. Citing Bank of America research, they noted that, “for the last four months, companies with high levels of capital spending have outperformed those with low levels.” It seems the economy’s tea leaves keep changing.
