State Revenue Growth: More Tortoise Than Hare

1/1/2018

STATE LEGISLATURES MAGAZINE | JANUARY 2018

Tortoise and hare illustration

 

The new year brings new challenges as general fund revenues trudge slowly along.   

By Erica MacKellar

In the last decade, while state programs continue to grow at a fast pace, state general fund revenues have grown only modestly, recovering far more slowly than in previous recessions. State general fund revenues increased only 1.9 percent in FY 2017, and are projected to grow 3.9 percent for FY 2018, according to an NCSL survey last October. 

K-12 education and Medicaid together account for about two-thirds of state budgets annually, and both are consistently the fastest growing program areas. In FY 2018, total state funding for Medicaid is expected to increase 7.2 percent. 

These, and other rising health care costs, and the unknown future of the Affordable Care Act, the Children’s Health Insurance Plan and federal tax reform made budgeting especially tough for states.

Uncertainty over federal policies will continue to be a concern in state legislatures this year, particularly in Maryland and Virginia and other states with economic ties to Washington, D.C. States are waiting to see how federal tax policies will change, and the potential effects on state budgets. Currently, 15 states allow taxpayers to deduct state and local income taxes when calculating federal taxable income, which is a key target in the congressional tax reform plan. 

Although some state budgets would not be drastically affected in the short term by a change in federal policy, ambiguity and a lack of direction could be challenging in the long term, because slow revenue growth leaves little margin for budgeting error.

Estimating Revenues, No Easy Task

All these challenges are compounded by the difficulty of estimating revenue, which may have contributed to the large number of legislatures—10—that had to go into overtime to adopt state budgets last year. In many states, both personal income tax and general sales tax collections have become more difficult to predict. Typically, as income grows, people purchase more and this drives sales tax growth. But that trend may be shifting—and it could be a long-term problem. The population of the United States is aging rapidly, and as people grow older, their consumption patterns change. Add to that the different prefer-ences of millennials who have put off buying houses (and all the goods that go inside of them) in favor of spending money on travel and other nonphysical goods, and revenue estimating in the states is no easy task. 

Severance tax collections are notoriously volatile, and with the current weak markets for oil and gas, energy-producing states are concerned. Alaska, which has no statewide personal income or sales tax, has been particularly hard hit. The state has drastically depleted its rainy-day funds to shore up budget shortfalls over the past few years. Some other energy-dependent states, however, such as North Dakota, New Mexico and Wyoming, are seeing some stabilization in state revenues from the energy sector.

Slow and Steady Wins the Race 

Despite these challenges, state budgets overall remain stable. With a few exceptions, states have largely replenished budget stabilization, or rainy-day, ac-counts, after drawing them down heavily during the Great Recession. Rainy-day funds in the states, plus states’ year-end balances, are projected to be a healthy 7.2 percent of FY 2018 general fund expenditures, which may help some states weather any future economic slowdowns. And some states continue to see higher-than-average revenue growth. Idaho, for example, finished FY 2017 with 8.8 percent revenue growth. 

There is a lot of uncertainty for state budgets in the coming year, and states have relatively modest state revenue growth to manage any surprises. But state budgets over the last few years have largely remained stable, meeting challenges as they come.  

This year will likely be no exception.

Erica MacKellar, a senior policy specialist, tracks state budgets for NCSL.

Additional Resources

Fiscal Year 2019 State Budget Status, includes map and table listing the 50 states.

The National Association of Legislative Fiscal Offices (NALFO) is the professional organization of legislative fiscal staff of the states and territories of the United States.

NCSL Resources