State Revenue Trends
States continue to warily recover from the Great Recession, the worst downturn to ravage state budgets in more than eight decades. Even though state revenues have improved from the depths to which they plunged at the height of the downturn, they still are significantly below pre-Great Recession levels. For instance, in fiscal year 2008, 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 fiscal year 2009, they continued their descent to $606 billion in fiscal year 2010 before crawling back up to $642 billion in fiscal year 2011. In fiscal year 2012, state revenues are expected to climb to $656 billion.
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 (Maine, Massachusetts, Rhode Island and North Carolina) 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, over 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, it is important to note that 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 also are 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 fiscal year 2008 stood at $687 billion, after dropping for several years, it is expected to reach $669 billion in fiscal year 2012. Continuing challenges are expected in fiscal year 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, Senator Jack Hill, chair of the Senate Appropriations Committee in Georgia, commenting on the revenue outlook in his state noted that "[S]tate 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."
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 fiscal year 2012, 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. 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 are set to expand their lotteries (Arizona, Illinois, Maine, New Hampshire and New York), 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 such as beach access permits, hospital licensing, background checks, as well as fees related to transportation and commerce.
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; persistently high unemployment rates in so many states; the winding down of funds provided by the American Recovery and Reinvestment Act of 2009; political gridlock in Washington; and, on the overseas front, ongoing economic and political turmoil in Europe and the Middle East; 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. As Representative Jim Fannin, chair of the Louisiana House Appropriations Committee and the SLC's Fiscal Affairs and Government Operations Committee commented, "[T]he state's economists were cautiously optimistic that the fiscal year 2011 revenue collections would come in at the amount projected and fiscal year 2012 revenues are projected with a 6 percent growth. However, even with long-range projections reflecting a 4 percent annual growth, Louisiana will have to continue to find ways to meet education, healthcare and infrastructure needs in the years ahead."
Posted by: Sujit M. CanagaRetna, Senior Fiscal Analyst
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