WASHINGTON – General fund revenues received by the 50 states experienced their largest increase in seven years in fiscal 2018 as they rose 6.2% to an estimated $837.7 billion, according to the National Association of State Budget Officers.
The NASBO report released Thursday said states experienced “a significant uptick in personal income tax collections in the last eight months.” For most states that period covered November 2017 through June 2018 during the debate and enactment of a federal Tax Cuts and Jobs Act.
“States have been analyzing their revenue collections to understand the amounts that may be of a one-time nature, such as higher than normal capital gains and dividend income, or repatriated income in response to the federal tax changes,” the report said.
Transportation revenue was another bright spot, increasing by 7.1% in fiscal 2018 and 6.5% the year before. Some states have raised their gas taxes. The number that collect fees on electric vehicles has grown to 20, including nine that also charge fees for hybrid vehicles.
The biggest source of dedicated transportation revenue was motor fuel taxes which produced 41% of the total, according to NASBO, followed by licenses and registrations at 19%, vehicle sales and use taxes at 8.8% and tolls at only 1.5%.
On the other side of the ledger, total state spending rose 4.6% in fiscal 2018 and exceeded $2 trillion for the first time.
The increase represented an acceleration from spending increases of 3.8% in fiscal 2017 and 1.4% in fiscal 2016, but remained below the 32-year average of 5.6% tracked by NASBO.
“Improved” was the oneword John Hicks, executive director of NASBO, said summarizes the current condition of state budgets, attributing it to increasing revenues that are reflective of the improved national economy.
“We’ve had a couple of years of very tight budgets and this report and the new budgets for ’19 are showing some loosening of those tight budgets,” Hicks said.
State finances have undergone "a remarkable change" over the last year, said Gabe Petek, the S&P Global sector leader for state finances. "I think it’s primary a function of the economy and revenue performance,” he said.
Petek cautioned that the 3% economic growth this year is expected by S&P economists to be followed by a deceleration to 2.3% in 2019 and 1.9% annual growth in subsequent years.
State budgets will be strained in the coming years because they are structured for a 3% growth rate with expenditures growing faster than that. The NASBO survey found debt service spending rose $3.1 billion to an estimated $62.8 billion, up 5.2% from $59.7 billion in fiscal 2017.
Only 44.9% of debt service payments by the states came from general funds.
“Some states reflect no general fund spending for debt service because they earmark certain tax revenue streams to support bond repayments and direct those resources to state funds other than the general fund,” the report said. “In fiscal years 2016, 2017, and 2018, debt service represented 4.6% of spending from state funds (general funds and other state funds combined, excluding bonds).”
Hicks said debt service and transportation revenue are new additions to the annual survey.
“New York and Illinois, two very large states with a decent amount of debt, they dedicate certain revenue streams that would normally go to the general fund to their debt service funds,” Hick said. “In many other states those dollars would be located in the general fund.”
NASBO also said all eight geographic regions of the nation experienced “at least a slight rise in total state spending in fiscal 2018, with the strongest growth reported in the Far West and the Southeast.”
All major state program areas experienced an increase in spending, with the largest category remaining elementary and secondary education at average of 35.8% of of general fund expenditures followed by Medicaid at 20.2%.
State spending on elementary and secondary education rose 4.6% in fiscal 2018.
Medicaid health services for the poor which are jointly funded by the federal government and the states rose 4.4% to $603.2 billion, up by $41 billion from the prior year.
Medicaid represented 58% of the federal funds received by the states in fiscal 2018, up from 43% 10 years earlier.
State spending on Medicaid rose in so-called expansion states that have increased eligibility for the program as the state share of the costs rose to 5.5% from 2.5% in fiscal 2018. The state share is scheduled to ratchet up to 6.5% in the current 2019 fiscal year, 8.5% in 2020 and 10% in 2021.
No new states expanded Medicaid eligibility in fiscal 2018, but Virginia’s legislature earlier this year agreed to an eligibility increase that will begin Jan. 1. In addition, voters in Idaho, Nebraska and Utah earlier this month approved referendums to expand Medicaid. Maine voters approved an expansion in November 2017 but the state has yet to finalize a funding mechanism, Hicks said.
In other areas, spending for higher education increased 3.2%, transportation spending rose 6.5%, corrections spending rose 4.6% and public assistance through the Temporary Assistance for Needy Families (TANF) program and other cash assistance programs increased by 0.7%.
