State Forecasts: Economic Growth, Lagging Revenues

State governments are predicting moderate economic growth for the remainder of this year and even stronger growth next year, but they don't expect the economy to power a substantial recovery in state tax revenues until mid-2004 or perhaps even later.

"Even if everything works out as states are hoping and the stock market stays strong, states may not reap much of that benefit until next April at the earliest," said Nick Jenny, a fiscal analyst at the Rockefeller Institute of Government in Albany, NY.

Jenny recently completed a survey of state economic forecasters and found that the median prediction for real gross domestic product growth in 2003 is 2.7 percent, followed by 4.1 percent growth in 2004. The forecasts form the ground on which state tax revenue expectations, and ultimately budgets, are built.

"This is not wildly far off from what you'd see in your baseline economic projection from private forecasters," Jenny said. For example, according to a survey conducted by Blue Chip Economic Indicators in Kansas City, Mo., leading private economists predict that the economy will expand 2.3 percent this year and 3.7 percent next year. State officials are banking on this growth to shrink unemployment rolls, increase corporate profits and fuel consumer spending, all of which generate revenue for government programs. Also, they hope that the growing economy will alleviate pressure on government programs that serve poor people, including welfare and Medicaid, the state-federal health care program that serves more than 40 million low-income and disabled individuals.

Despite the improved outlook, some state officials remain wary, saying that it takes a year and sometimes longer before a growing economy results in swiftly growing tax revenues.

"Historically state revenue will recover slower than the economy. So I believe, in Kentucky for sure and in many other states, we do not feel that we have passed the crisis," Kentucky Gov. Paul Patton (D) said at the National Governors' Association's summer meeting in Indianapolis.

Some governors are also concerned that the needs of most state programs have grown over the past few years even as revenues have not. This means that future revenue growth, even if strong, could be insufficient to meet pent-up state needs.

"Even with an economic recovery, there will be a substantial gap between available revenues and the spending requirements which we would all judge as non-discretionary," Virginia Gov. Mark Warner (D) said Monday (8/25) in a speech to the Virginia General Assembly's finance committees.

Warner said some of these "non-discretionary" areas include education, social services, homeland security, car-tax reimbursements and the state employee retirement system.

Even though Patton and Warner are concerned that their budget problems will not disappear as the economy grows, states do find themselves in much calmer fiscal waters now than they did last August.

At that time, states were emerging from one of the worst fiscal years on record, fiscal year 2002, when tax revenue shrank 5.6 percent, according to Rockefeller. This is the largest decline in the 12 years Rockefeller has tracked state finances.

Since then, state tax revenues have grown slowly and steadily, partly due to state lawmakers raising taxes. This growth, however, has not been fast enough to outpace growth in population and inflation, meaning that state budgets remain tight now and in the foreseeable future.