Fiscal Survey of States Shows Fiscal Improvements May Be Temporary

WASHINGTON — Higher revenue collections have boosted the short-term outlook for states but the slow economic recovery and stubbornly high unemployment have many states worried that the fiscal improvements may be temporary.

The Spring 2013 version of the Fiscal Survey of the States, released Thursday by the National Governors Association and the National Association of State Budget Officers shows that "fiscal distress is finally beginning to subside for most states" but says they are challenged with providing resources in critical areas.

"State spending in fiscal 2013 is still below the fiscal 2008 pre-recession peak," said NGA executive director Dan Crippen. "Lower real-spending levels in fiscal 2013 compared to fiscal 2008 indicate that state budgets are not growing fast enough to make up for recession-induced declines and inflation. Governors are aware that the federal spending cuts started by sequestration will only get worse."

The report highlights that the tax provisions in the American Taxpayer Relief Act of 2012 have increased uncertainty for states regarding future federal actions. "In particular, the net impact on states from continued fiscal tightening remains unclear," the report said.

One of the most visible indicators of state fiscal health are net mid-year budget cuts, which demonstrate that states will not be able to meet previously set revenue collection forecasts. Eleven states enacted net mid-year budget cuts in fiscal 2013 totaling $1.3 billion, slightly less than the $1.7 billion of such cuts in 2012. At the height of the recession 41 states in fiscal year 2009 that cut their budgets multiple times after the budget was enacted.

"What we found in this particular report is that we are seeing moderate fiscal improvements and they are fairly widespread," said NASBO executive director Scott Pattison. "There are very few states that are not doing well and improving. On the good news side, both revenues and spending have, for the first time since the recession, been above pre-recession levels."

State revenue improvement and spending controls have helped to significantly reduce budget gaps in fiscal 2013, the report said. Eighteen states reported closing $33.3 billion of budget gaps in fiscal 2013 and two states have a combined $538 million in remaining gaps that must be closed by the end of the fiscal year.

General fund expenditures in fiscal 2014 are projected to increase by 4.1%, but at a rate less than the historical average, the report said.

General fund revenues are projected to rise by 2.8% in fiscal 2014 to $723.4 billion, up $20 billion from $703.4 billion collected in fiscal 2013. This is a slower growth rate than the estimated 4.2% gain in fiscal 2013, which was up from $675 billion from the previous year.

Revenue collections have outpaced projections in fiscal 2013 so far, which has helped relieve spending pressures, the report said. Specifically, personal income tax collections are estimated to increase by 6.2% in fiscal 2013 and are projected to increase by 3.7% in fiscal 2014.

However, some of the increases are most likely due to a one-time gain for states as taxpayers shifted capital gains, dividends, and personal income to calendar year 2012 to avoid potentially higher federal taxes that were set to go into effect January 1, 2013.

"We don't expect that to be something that will be repeated," Pattison said.

Governors are proposing a total of $2.9 billion in new net taxes and fees for fiscal 2014, with 14 governors proposing tax increases. This is significantly lower than the $6.9 billion enacted in net tax and fee increases for fiscal 2013. Thirteen governors are proposing tax decreases.

Massachusetts, Michigan and Minnesota are the states with the largest proposed tax increases while Ohio, Texas and Indiana have proposed the largest tax decreases.

Governors' spending plans show fiscal 2014 will likely be the fourth consecutive year of budget growth for many states, even though aggregate general fund spending and revenue will remain below historical growth trends, the report said.

It is estimated that general fund spending is projected to reach $728 billion in fiscal 2014, a 4.1% increase from the $699.2 billion spent in fiscal 2013. For the first time, general fund spending in fiscal 2013 surpassed pre-recession highs, which reached $687.3 billion in 2008.

Lower state spending in fiscal 2013, when compared to fiscal 2008, indicates that state budgets are "not growing quickly enough to make up for recession-induced declines and inflation."

Finally, 27 states reported that recommended budgets for fiscal 2014 contained changes in state aid to local governments. Many states recommended spending increases for K-12 education, infrastructure, and transportation or capital improvement programs.

"Although state aid to local governments is projected to increase in many states in fiscal 2014, many local governments will likely continue to face fiscal challenges because of federal budget cuts under sequestration and the continued historic decline in property tax collections," the report said.

Finally, the report noted that the Senate-passed Marketplace Fairness Act, known as the online sales tax bill, is a top priority for all of the governors. The bill is pending in the House, where it faces stiff opposition from conservative members. The report estimates states fail to collect more than $23 billion annually from transactions conducted over the Internet or through catalogues.

"Given a little time when we can work with House members to discuss their concerns, I expect we will get there this year," Crippen said. "It's a little hard to say what the future holds other than what we believe to be true which is that Internet sales are going to go up and therefore sales tax revenues are going to go down because of that."




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