Since the start of the pandemic, state revenues have remained more resilient than experts expected, and fiscal conditions in the states remain strong.
Thirty-nine states and Washington, D.C., responded to a recent NCSL survey about state fiscal conditions. Of those, 26 states and Washington, D.C., expect to meet their general fund revenue estimates for the fiscal year that ends June 30 in most places. Eleven states are on track to exceed their estimates, and California and Rhode Island might fall short of current revenue estimates. Rhode Island’s estimates have previously been revised upward, however, and California has significant budget reserves, which could help resolve a shortfall.
The federal government also extended the income tax filing deadline to Oct. 16 for many Californians affected by recent natural disasters. The state has followed the move, and the extension will likely lower California’s income tax revenue collections in the short term and push some revenue collections into the next fiscal year.
Despite their confidence in revenues for the current fiscal year, many states expect a decline in growth for the year ahead. Much of the growth in the last few fiscal years was considered nonrecurring and has been used for one-time projects such as maintenance of roads and other infrastructure and to shore up rainy day funds.
State economists are monitoring the broader U.S. economy for signs of a recession, but most appear confident that their states can weather a moderate economic downturn.
Confronting Inflation
As the Federal Reserve works to tackle inflation in the U.S. economy, states are also grappling with inflation in their budgets. Inflation has been a double-edged sword for most states. As consumers continue to spend despite rising interest rates, leading to robust sales tax revenues in many states—Arkansas, Connecticut, Nevada, Texas and Wisconsin, among others—inflation is also driving up the cost of providing government services.
This is particularly evident in infrastructure and other capital projects, which over a dozen states reported are more expensive because of inflation. Delaware reported that construction project costs increased by as much as 40% from initial estimates. Lawmakers are confronting these cost overruns in some creative ways. Last year, North Carolina established a $250 million inflationary reserve for capital projects. The General Assembly also established a $1 billion stabilization and inflation reserve to address other costs associated with inflation and to steady the state’s economy.
Many U.S. employers are raising wages in the face of a tight labor market and rising inflation, which has led to increased personal income tax collections in some states, including Illinois, Kentucky and New Mexico. At the same time, inflation is putting pressure on state employee salaries in several states, such as Alaska, Colorado, Kansas, North Dakota, Pennsylvania and Wyoming. While inflation has both positive and negative effects from a state budget perspective, some states, including California and Ohio, note that if it persists, there is greater risk the Federal Reserve will continue to increase interest rates, which could lead to slower economic growth, even a recession.
Looking Forward
As states craft their FY 2024 budgets, fiscal conditions overall remain stable. State revenues have outperformed expectations, and states are largely prepared for a modest economic downturn. The U.S. economy still faces challenges, however, and states continue to monitor their fiscal situations in light of a potential recession and continued economic uncertainty.
Erica MacKellar is a program principal in NCSL’s Fiscal Affairs Program.