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April 14, 2010

States Keep a Close Watch on April Tax Collections

As Americans flock to their post offices to file their federal and state income tax returns by April 15, state officials will be keeping a close watch to gauge the strength of personal income tax collections. This performance could say a lot about future collections and, to a large extent, the future health of state budgets.

The National Conference of State Legislatures' (NCSL) “State Budget Update: March 2010” provides information on all 50 states and Puerto Rico. The report is based on data collected from legislative fiscal directors in March 2010 and includes information on state revenue performance, the revenue outlook for FY 2011 and projections of future budget gaps. It also takes a special look at state actions to address the end of funding provided by the American Recovery and Reinvestment Act (ARRA).

Although spending overruns — especially for Medicaid — are increasingly pinching state budgets, the principal cause of budget gaps has been the steep drop-off in state revenues. The continued poor performance of personal income and sales taxes accounts for much of the problem in FY 2010. Through the first eight months of the fiscal year, 25 states reported that personal income tax collections were below the latest target. General sales taxes were below the most recent forecast in 23 states and Puerto Rico (see Table 4). 

“This recession has had a particularly deep impact on state revenues, producing near-record shortfalls in state budgets,” says William T. Pound, executive director of NCSL.  “Our data indicate that states will have a rocky road ahead of them — for several more years — even if the recession is officially over.”

Indeed, leading economists believe the U.S. economy began a recovery sometime in the third quarter of 2009, and there is growing evidence state revenue collections are slowing their rate of decline or even bottoming out in many states. In a noteworthy development, nearly every state projects that FY 2011 revenues will exceed current year levels (see Table 6). 

  • Forty-one states and Puerto Rico expect revenues to grow above FY 2010 collections. The largest reported increases are expected in Texas (7 percent), Hawaii (6 percent), Minnesota (5.6 percent) and Vermont (5.4 percent).  
  • Four states — Alabama, Idaho, Kansas and South Carolina — project revenues to be flat in FY 2011 compared to FY 2010.
  • Five states expect FY 2011 collections to be lower than current year amounts. 

“State forecasters have had a particularly difficult time estimating revenues in this economy,” says Corina Eckl, NCSL’s fiscal program director.  “Many states are projecting razor-thin revenue growth for next year, so expectations could easily be squelched if collections are off even slightly.“

Because of this, officials in 34 states are concerned about the revenue outlook for FY 2011, three states reported they are pessimistic, and officials in 13 states and Puerto Rico foresee a stable revenue outlook.

Despite having already closed a cumulative $174.1 billion budget gap in their FY 2010 budgets, more budget gaps loom. New FY 2011 budget gaps are on top of the sizable gaps already closed in FY 2009 and FY 2010. 

  • At least 38 states and Puerto Rico are dealing with FY 2011 gaps that total $89 billion, nearly $34 billion more than the estimate just four months ago.  
  • Twenty-four states and Puerto Rico report gaps of 10 percent or more in their general fund budgets. 
  • Twelve states did not report a gap. In North Dakota and Alaska a gap is not expected in FY 2011.

State budget gaps loom as far as the eye can see:  31 states and Puerto Rico already foresee gaps in their FY 2012 budgets of at least $73.5 billion (see Table 9), and 21 states already project FY 2013 gaps of at least $64.7 billion (see Table 10). Including previous amounts, states will have addressed budget gaps in excess of $531 billion since the recession began in December 2007.

Ironically, the end of the American Recovery and Reinvestment Act funds is emerging as a significant contributor to budget gaps. State officials have always been aware that these funds would end. Fewer than half the states, however, have taken specific actions to prepare for the impending loss (see Table 11). NCSL asked legislative fiscal directors to identify any actions taken to date.

  • At least a dozen states are operating on a lowered spending base to manage the loss of ARRA funds. They have permanently reduced spending, with some expecting further reductions when the full impact of the ARRA loss hits.  
  • Arkansas, Missouri, North Dakota and Texas specifically tagged federal stimulus funds as one-time money in the budget with no definite plans to replace the funds.  
  • Some states are looking at streamlining and government efficiencies to help address the loss of ARRA funds. 

At the time of the NCSL survey, many states were still in legislative session and were deliberating upon their budgets. Some fiscal directors noted that more information on state actions to address the loss of ARRA funding would be available after sessions and budgets were complete.

This report continues NCSL's long tradition of providing accurate, comprehensive and nonpartisan data on state finances. Credentialed members of the media may receive a free copy of NCSL’s “State Budget Update: March 2010.” All other interested parties may purchase a copy through NCSL’s bookstore.

Requests must be made through the NCSL Press Room. This publication and attached PDF are registered with the NCSL copyright and may not be reproduced, uploaded or distributed in any way in its entirety.

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NCSL is a bipartisan organization that serves the legislators and staffs of the states, commonwealths and territories. It provides research, technical assistance and opportunities for policymakers to exchange ideas on the most pressing state issues and is an effective and respected advocate for the interests of the states in the American federal system.