Slow revenue growth could mean tough times ahead for states

“The economy is sluggish and we don’t know what to expect from the federal government. We’ve got some tough times ahead,” Brian Sigritz, Director of State Fiscal Studies for the National Association of State Budget Officers (NASBO) told Fiscal and Economic Development Committee members last week during CSG’s National Conference in Williamsburg, VA. “There’s really just not enough money to go around.” 

Released yesterday, NASBO’s Fall 2016 Fiscal Survey of the States echoes Sigritz. According to the report, general fund revenue growth slowed in fiscal 2016, with 25 states ending the year with collections below budget forecasts. In addition, 19 states reported net mid-year budget reductions in fiscal 2016, which the group notes is “a historically high number outside of a recessionary period”.

So far in fiscal 2017, 24 states are reporting general fund revenues coming in below projections – “the highest number of states expecting revenue shortfalls at this time in the fiscal year since 2010”.

While states overall continue to see moderate growth in general fund spending, revenue growth is slowing down and states are seeing softening tax collections. The revenue slowdown is being driven by a number of factors, according to NASBO:

  • Personal income tax collections were negatively affected by the weak stock market gains in calendar year 2015, and corporate income tax collections declined.
  • Sales tax growth was weak, affected by low inflation and slower growth in consumption of taxable goods and services.
  • Continued decline in oil and gas prices and coal production, which resulted in a significant drop in severance tax revenues and has a negative impact on energy-producing states and overall general fund revenue growth.

The bottom line: with tax revenues coming in lower than expected and some states still struggling to recover from the recession, state policymakers will be spending a lot of time in the 2017 legislative sessions trying to fill in the gaps - a problem that has become all too common. 

“We’ve plugged the holes. We’ve cut other places to make sure that funding is still there,” said Delaware Rep. Helene Keeley, co-chair of CSG's Fiscal and Economic Development Committee. “A lot of the states out there already have a bare-bones budget and Delaware is one of them. We are walking into a fiscal year where we already have a $350 million dollar deficit and a bare budget already.” 

The sluggish recovery has made moving forward difficult and NASBO's prediction of slow growth means fiscal conditions in many states will remain tenuous. "It seems like we get some really good news and I think great, we’re really getting ahead and then boom! We hit another bump," said Keeley. "So it's 2 steps forward, one step back and we never seem to quite get out of the weeds."