7. State Revenue Trends
States continue to slowly recover from the Great Recession, the worst downturn to ravage state budgets in more than eight decades. Although state revenues have improved from the depths to which they plunged at the height of the downturn, they are still significantly below pre-recession levels.
For instance, in the 2008 fiscal year, the year immediately preceding the Great Recession, total state general fund revenues stood at $680 billion. Not only did they sink to $625 billion in the 2009 fiscal year, but they also continued their descent to $606 billion in the 2010 fiscal year before crawling back up to $642 billion in the 2011 fiscal year. In the 2012 fiscal year, state revenues are expected climb to $656 billion.
That creates major challenges for revenue.
“Even with long-range projections reflecting a 4 percent annual growth, Louisiana will have to continue to find ways to meet education, health care and infrastructure needs in the years ahead,” said Louisiana Rep. Jim Fannin, chair of his state’s House Appropriations Committee.
In some states, that may mean tax hikes. Despite the toxicity of raising taxes in the current political environment, a number of states have enacted actions targeted at increasing revenue through tax and fee hikes. In the 2012 fiscal year, states have proposed $13.8 billion in new taxes and fees and $2.8 billion in new revenue measures even though a substantial share of this increase stems from increases in California, Connecticut and Minnesota.
Preliminary tax collection data for the second quarter of 2011 (April through June) by the Rockefeller Institute demonstrates that collections from major state tax sources increased by 11.4 percent in nominal terms compared to the same period in 2010. This was the strongest year-over-year expansion since the second quarter of 2005. Not only did all the reporting states indicate an increase in personal income taxes in the quarter, all but four states—Maine, Massachusetts, North Carolina and Rhode Island—noted gains in sales taxes, and only New Hampshire reported a decline in overall collections. This trend is a significant improvement from the last two fiscal years; in fact, more than 20 states experienced double-digit growth in overall tax collections in the quarter compared to the same period in 2010.
Notwithstanding the improving revenue picture in fiscal years 2011 and 2012, state revenue intakes continue to significantly lag levels reached before the Great Recession. State policymakers around the country, in recognition of this disturbing trend, continue to be very cautious in formulating general fund spending levels, which are also significantly lower—despite population increases and increased demands on state government services—than the amounts before the Great Recession.
For instance, while general fund spending in the 2008 fiscal year stood at $687 billion, after dropping for several years, it is expected to reach $669 billion in 2012. Continuing challenges are expected in 2013 when states are cumulatively expected to face a shortfall of $46 billion. (Between fiscal years 2009 and 2013, states have closed or will close shortfalls that will cumulatively add up to $580 billion).
In fact, Georgia Sen. Jack Hill, chair of his state’s Senate Appropriations Committee, commenting on the revenue outlook in his state noted that “State revenues appear to be meeting the 6 percent growth programmed into the fiscal year 2012 budget. There are concerns for the fiscal year 2013 budget over whether revenue growth will continue at a rate high enough to meet the expected shortfalls in Medicaid, the state health benefit plan and K-12 and higher education enrollment growth.”
That puts tax increases on the table in some states. For instance, Connecticut will generate $2.6 billion over the biennium by increasing the number of income tax brackets and other income tax changes, expanding the sales tax to cover more services and increasing the sales tax rate, and imposing a higher surcharge on corporations, among other increases. Hawaii will raise more than $600 million over the biennium by limiting general excise tax exemptions for businesses and by eliminating the standard deduction and capping itemized deductions for higher income filers, among other actions. Maryland will secure $85 million from an increase in the alcohol tax, and $64 million in increased motor vehicle fees, while Nevada will recoup $620 million in revenues by postponing several taxes that were scheduled to expire this year, including retaining the sales tax rate at 6.85 percent until July 2013.
Five states—Arizona, Illinois, Maine, New Hampshire and New York—are set to expand their lotteries, while Illinois is slated to expand gaming. Other revenue enhancing measures include Arizona issuing lottery revenue bonds; California increasing tuition fees for university students; New York improving voluntary tax compliance and increasing revenue from abandoned property sales; and, Rhode Island increasing a host of user fees including access to beaches, hospital licensing, background checks, transportation-related and businesses.
Even though state finances appear to have pulled back from the abyss of the Great Recession, they continue to face significant fiscal headwinds related to a number of interconnected elements: the lackluster performance of the economy, the persistently high unemployment rate in so many states, the wind-down of funds provided by the American Recovery and Reinvestment Act of 2009, the political gridlock in Washington and on the overseas front, the ongoing economic and political turmoil in Europe and the Middle East, the fallout from the tragic earthquake and tsunami in Japan and the volatility in world oil prices. Alongside these setbacks, states also face a number of long-term challenges related to healthcare, education, pensions, unemployment insurance, infrastructure and emergency management that require the urgent attention of policymakers.
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