FRANKFORT, Ky. — We know from the state Budget Office report released late last month that state officials are predicting stagnant revenue growth throughout the rest of this year and the first three months of next year. But have recent state revenue losses impacted those predictions?

More than likely.

Kentucky is seeing growth from a few revenue streams, but our economy is not making the major recovery some economists are seeing at the national level. One reason, as I explained last week, is weak growth in employment and personal income that Kentucky officials expect to continue well into the current fiscal year. Revenues from sales and use tax receipts, individual income tax, property tax and other income streams that are directly tied to employment and personal were down—some way, low down—in the fourth quarter of the last fiscal year and will have to show some major improvement before state officials are liable to change their predictions.

A closer look at tumbling state revenues from the fourth quarter of FY 2009 shows the most significant losses occurred in the areas of sales and use tax, individual income tax and corporate income taxation—historically the state’s largest revenue sources. If revenue is closely tied to employment, it probably comes as little surprise that the biggest drop in revenue among these three revenue streams was in the area of individual income tax receipts.

Individual income tax revenue took a massive loss between the fourth quarter of FY 2008 and the fourth quarter of FY 2009 with a $197.6 million—or 17 percent— drop in receipts. The state Budget Office report stated that all components of the tax, including declarations, net return, withholding and fiduciary, posted declines in the last quarter of FY ‘09 compared to a year ago.

The second worst drop in revenue seen in the fourth quarter was a $47.9 million loss in corporate income taxes, reflecting a 38.3 percent decrease for the quarter. Final revenue figures show that the state received only $77.1 million in corporate income tax in the fourth quarter of 2009—much less than the $125 million collected in the fourth quarter of FY 2008. State officials said the reductions were caused by “expectations that corporate profits would remain weak.”

The third biggest loss in revenue during the fourth quarter of FY 2009 was in sales and use tax revenues, which fell three percent for a total loss of $21.3 million as unemployment grew and wages stagnated. A lack of disposable income caused consumer spending to drop off, harming this important state revenue stream. Losses in the sales and use tax area were offset somewhat by a new sales tax on package alcohol sales, which the state Budget Report said brought “a small infusion of receipts”. That new revenue stream was created during the 2009 General Assembly last spring.

The decrease in revenues from these major sources has no doubt hurt programs and services throughout state government. So have losses from other revenue streams. Property taxes—another indicator of economic growth—were down in the fourth quarter of FY 2009 by 4.5 percent, along with state Road Fund receipts (down 2.1 percent from a year before) which were affected by a yearlong decline in motor vehicle usage taxes. Usage tax receipts were down 16.5 percent from a year earlier due to lagging motor vehicle sales, according to the report.

Not every source of revenue took a nosedive, however. The fourth quarter of FY 2009 saw increases of 11.1 percent in the LLET (Limited Liability Entity Tax on business) thanks to enhanced collections by the state. Other growth areas were in coal severance taxation—up 12.7 percent due to strong coal prices—along with a 101.7 percent increase in the state cigarette tax for fourth quarter 2009 receipts of $82.8 million. The increase in the cigarette tax doubled the tax rate on cigarettes from 30 cents to 60 cents a pack.

An important thing to remember about the recession and the changes it has wrought is that hard times will not last forever. A financial “checklist” I read some months back from the investment advising firm Edward Jones said it best: “Be patient,” it read. “No one can predict when a bear market will end, but history has shown that turnarounds can happen quickly and unexpectedly. So be patient.”

Next week, we will wrap up our look of the state Budget Office report by reviewing the report’s detailed outlook for the state’s immediate economic future. For now, enjoy the rest of summer and the start of what I hope is a great school year.