August 15, 2006
States Use Unexpected FY 2006 Revenue for Rainy Days, Education, Tax Cuts
State budget and tax actions cataloged in new NCSL report
NASHVILLE—An unexpected revenue surge has allowed states to replenish rainy day funds, bolster support for education and other programs and reduce certain taxes—including personal income taxes by $600 million, according to the National Conference of State Legislatures' latest survey of states' fiscal conditions.
State Budget and Tax Actions 2006: Preliminary Report includes budget data from 49 states and tax data from 44. It shows that states finished Fiscal Year (FY) 2006, with nearly 25 percent more money in year-end balances than they had at the end of FY 2005. During the past year, states' balances rose from a combined total of $45.8 billion to $57.1 billion. And at 10.2 percent of states' budgets, year end balances are at one of their highest levels in decades. Still, forecasters warn of structural deficits down the road.
Twenty-eight states ended FY 2006 with a higher year-end balance than they had in FY 2005. In 19 states, the balance dropped. And in two states, it stayed the same. No state ended FY 2006 with a deficit, though Arkansas had a zero balance.
Forecasters projected revenues to grow by 2.7 percent in FY 2006. But once the books closed on the most recent fiscal year, the actual figure was 7.7 percent.
"Not only do we have the rebounding economy to thank for this, we also should applaud the diligent work of state legislators across America who have been smart managers of public money," said NCSL President Steve Rauschenberger, an Illinois senator. "State legislators have learned from the budget crisis of the early part of the decade, as we can see by the prudent choices they're making now."
In their FY 2007 budgets, 25 states increased reserve funds, with 18 of those making deposits specifically to rainy day accounts. Maryland, for example, put away $593 million, Connecticut $439.5 million and Georgia $430 million. Virginia paid future years' rainy day deposits. Other states added to other types of reserve funds. Overall, rainy day funds grew by 23 percent during the past fiscal year, accounting for nearly half of the states' collective $57.1 billion year-end balance.
In states where legislators used the new revenue to increase support for programs, education was the most common beneficiary. Twenty-four states boosted K-12 education funding for FY 2007 and 20 put more money toward higher education. Fourteen states increased Medicaid funding; 11 increased corrections; ten increased transportation. Fourteen states plan to use the new revenue to pay for one-time capital expenditures.
The improved fiscal picture meant states had to take fewer actions to raise revenues. In FY 2006, states generated $3.4 billion through taxes increases. That figure will drop to $1.4 billion in FY 2007, based on actions taken so far in 2006 legislative sessions. In FY 2006, state legislators cut income taxes as well as corporate and business taxes, but they raised sales and tobacco taxes, health care taxes and motor fuel or vehicle taxes. The results of these actions will be apparent in FY 2007.
States cut personal income taxes by nearly $600 million. They cut corporate and business taxes by $124 million. And they took steps to help localities offer property tax relief. New Jersey, South Carolina and Texas, for example, reduced reliance on property taxes in favor of other revenue sources. Other states, including Indiana, Kansas and Maryland, provided targeted property tax relief.
Despite states' current fiscal health, experts worry about the future. Overall, FY 2007 general fund spending is budgeted to grow by an average of 7.6 percent in the 49 reporting states, in order to meet the growing spending needs of programs like education, Medicaid, health care and corrections. Revenues, on the other hand, are projected to grow by a conservative 3 percent. This mismatch is the reason state balances are projected to fall by 29 percent by the end of FY 2007. Legislative fiscal directors in many states worry that state spending will outpace ongoing revenue growth over the longer term, leading to structural deficits beginning as early as FY 2008, the report says.
"State legislators are taking advantage of today's strong revenue growth. They're using it to fund one-time expenses and they're shoring up reserves," said NCSL Executive Director William Pound. "It would be nice if the federal government would stop undermining their efforts by exporting their own deficit to the states. Each year, states pay tens of billions of dollars in unfunded federal mandates."
Credentialed reporters can request a free electronic copy of State Budget and Tax Actions 2006: Preliminary Report, by sending an email to press-room@ncsl.org. Others can purchase the report for $30 at NCSL's online bookstore, www.ncsl.org/bookstore. The final report on state budget and tax actions for FY 2006 will be published later this year.
NCSL is the bipartisan organization that serves the legislators and staff 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.
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