WASHINGTON – Governors are recommending an overall increase of only 1% in spending for state fiscal years that generally begin July 1, according to a new survey by the National Association of State Budget Officers.

It’s the smallest proposed increase in state spending since the 2010 fiscal year that began for most states immediately after the Great Recession ended in June 2009.

Forty six states have fiscal years that begin July 1. Only New York, with a fiscal year beginning April 1, starts earlier. Texas starts its fiscal year Sept. 1, while Alabama and Michigan use the same Oct. 1 starting date as the federal government.

The caution among governors comes on the heels of 2017 budget shortfalls in 33 states that necessitated midyear actions. At least 23 of those states already have made budget cuts totaling $4.9 billion in fiscal 2017, NASBO said.

“Revenues are surprisingly low,’’ said John Hicks, executive director of NASBO. “That is what drives so much of their fiscal behavior.’’

John Hicks is executive director of NASBO. Photo provided by NASBO.
John Hicks is executive director of NASBO. Photo provided by NASBO.

Sales tax and state income tax revenues have come in below projections in most states, according to Hicks.

Income tax revenue also has grown slower at the federal level as some high income taxpayers have deferred receiving non-wage income this year in anticipation of lower rates from federal tax reform.

Noting that the nation is in its eighth year of the economic recovery, Hicks said, "To have that many states revise downward their revenue estimates at this point is a surprising number. It’s too big to not be a trend of some sort.’’

On the positive side, states have socked away an average of 6% of their annual spending into their rainy day funds.

The states are anticipating a 3% growth in overall revenue in the 2018 fiscal year. But they are planning for only 1% increase in spending in order to readjust their budgets for the measures they took in fiscal 2017 to account for shortfalls. Many used one-time revenue sources to close the 2017 gap.

“Governors have tried to enact budgets that are structurally balanced,’’ Hicks said.

Most of the additional funding will go toward elementary and secondary education with the overall increase estimated at $6.1 billion.

The second largest piece of state budgets, the state and federal partnership for providing Medicaid health care services to low income households, would increase by $1.6 billion, NASBO said. Thirty one states and the District of Columbia have expanded their eligibility for Medicaid under provisions of the 2010 Affordable Care Act. This is the first year for states to begin paying 5% of the cost of that expansion, which will creep up to 6% in 2018, 7% in 2019, and 10% in 2020 unless new health care legislation being considered by congressional Republicans alters that path.

Seven states –- California, Indiana, Montana, South Carolina, Tennessee, Utah and Wyoming –- have decided this year to increase their fuel taxes to meet their ongoing transportation needs, the survey found. Montana’s fuel tax hike was the first in 25 years, according to NASBO. South Carolina’s was the first in 30 years. California is instituting an inflation index that begins in 2020 on top of its interim increases in fuel tax hikes.

Tennessee and three other states -- Alaska, Oklahoma an West Virginia -- have proposed a $726 million increase in fuel taxes in the coming year, the survey reported.

Governors have proposed a net increase in taxes and fees of $3.7 billion, with 15 states facing a possible increase of $4.9 billion and 12 states having proposed tax and fee cuts of $1.2 billion.

Sales tax increases have been proposed in eight states while cuts have been proposed in seven with the net impact being a proposed hike of $1.7 billion.

Personal income tax increases have been proposed in five states and cuts proposed in 12 for a net impact of $1.2 billion in proposed cuts.

Only three states have proposed an increase in corporate income taxes while nine have a proposed cut with the net impact being a possible reduction of $153 million.

Tobacco tax hikes have been proposed in nine states resulting in a possible revenue increase of $791 million. Alcoholic beverage tax increases totaling $104 million have been proposed in four states.

Fee increases have been proposed in seven states while two states have proposed fee reductions. The net impact would be a $134 million increase in revenue.

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