State budgets on the mend, report says, but uncertainty clouds revenue projections

A report released today by the National Conference of State Legislatures (NCSL) says the days of rapid revenue declines is nearing an end for most states, a little under two years since the fall of Lehman Brothers and the beginning of the Great Recession. NCSL joins a host of state and local government fiscal observers in welcoming the revenue plateaus, but express caution over the end of Recovery Act funds, changes brought by health care reform and bleaker long-term forecasts.

According to NCSL’s State Budget Update: July 2010, this economic recession has been characterized by rapid declines in the revenue trifecta: sales, personal income and corporate income taxes.

These taxes have continually come in under target in a majority of states surveyed, leading many states to tinker with other forms of taxes, including oil and gas production, real estate transfers, tobacco production, hotels, and extending or increasing sales taxes on alcohol, soda and candy products.

“The recent state fiscal crisis has been almost entirely about revenues – or lack thereof,” the report said.

Chief among the tax shortfalls, and a testament to the depth/breadth of economic decline, was personal income, a source that accounts for nearly 35 percent of state own-source revenues. According to the 45-state survey, twenty states said that personal income tax collections were below the latest target – even after state budget-makers have had almost three years of practice in declining revenue estimates.

But NCSL says that “while revenues continue to underperform in some states, the declines have begun to soften,” and a, “number of states are beginning to see some signs of improvement.” General sales taxes and corporate income taxes appear to be on the mend in many states, and new budgeting cycles have pared spending down to pre-recession (and in some cases pre-2000) levels in many areas.

Despite the $787 billion stimulus package, year-over-year spending in FY 2010 was down in 34 states. This is because state and local government spending has contracted an estimated $43.1 billion since the start of the recession. Without the stimulus funds, overall government spending would have dropped much more dramatically. But those Recovery Act funds will end in 2012, leaving most fiscal officials to brace for a perpetuation of problems.Projected spending in 2011 will go up in thirty states, the NCSL report said, with a majority of the others expecting flat or slight declines in spending.

More than two-thirds (33) states project budget gaps in 2012, tallying over $72 billion. Though, this compares to nearly $84 billion in FY 2011 shortfalls facing 41 states during the compiling of their budgets this year.

“While many states appear to be in a more stable situation – the revenue freefall has abated – they are far from clearing the hurdles wrought by the recession,” the report continues. Many states predict revenue increases, but they also predict new and structural budget gaps extending beyond FY 2013.

Worries over the extension of enhanced Federal Medicaid Assistance Percentages (FMAP) and changes brought by federal healthcare reform are expected to create new gaps over the course of the next twelve months, officials indicated in their survey responses. And according to a recent report by the Rockefeller Institute, local governments’ revenue lifeline, property taxes, have begun showing signs of instability. Local governments reported declines in property tax revenue during the first quarter of 2010 for the first time since the start of the recession – adding to fears that local government have yet to hit bottom.

“FY 2011 may turn out to be the calm before the next fiscal tempest,” the report concludes.

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