updated 10/7/2008 4:18:46 PM ET 2008-10-07T20:18:46

State tax revenue rose slightly in the second quarter, but revenue from sales tax, fuel tax and property tax all dropped compared to a year ago, according to a report released Tuesday. The report warned that states and cities would be forced to cut spending as tax revenues dropped further.

Total tax revenue for the states was up 3.6 percent in the second quarter compared to the same quarter last year, according to the report from the State University of New York’s Rockefeller Institute of Government entitled “The Damage is Just Beginning.” Adjusted for inflation, revenue rose 1.6 percent versus the year-ago quarter.

Further weakening in July and August suggests tax collections will soften even more.

Fuel tax revenue for the second quarter fell 2.1 percent versus a year ago. This was the sixth quarter fuel tax revenue has seen year-over-year declines. Fuel taxes are usually levied at a fixed rate per gallon, so they mirror miles driven, not gas prices.

Property tax revenue fell 0.1 percent versus the year-ago quarter, while sales tax revenue fell 1.4 percent versus last year’s second quarter. This was the first drop in sales tax revenue since 2002, according to the report, which is based on tax data collected by the U.S. Census Bureau. The amount of sales tax collected declined in 28 states.

Corporate income tax revenue fell 8.3 percent versus the same quarter last year. This was the fourth straight drop in corporate income taxes.

The report reiterated a warning the Institute made earlier this year: “The underlying trend for states is negative; budget cuts and other gap-closing measures likely loom ahead.”


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