Stateline Story

State finances expected to dip

Most states are sitting on comfortable budget cushions, but falling home sales, higher energy prices and skimpier sales tax collections could bust some state budgets this year.
"We've seen the peak in state balances," said Corina Eckl, director of fiscal affairs for the National Conference of State Legislatures, concluding that "state finances are in transition" and heading downward.
  
Eckl spoke to Stateline.org from Boston where NCSL released Aug. 9 its report of state tax and budget actions for 2007 and preliminary data for fiscal 2008, which began July 1 for all but four states.
Cracks in state ledgers are already showing in Florida where economists blame a stalled housing market for the $1.1 billion hole in the Sunshine State's budget for this current fiscal year, which will likely be addressed during a special legislative session this fall.
A drop in home sales and prices mean states take a smaller cut - both in real-estate-related taxes and sales tax as most people who buy homes also purchase new appliances and carpeting and spend big money on home-improvements. Florida is particularly dependent on sales tax revenue since it does not have a state income tax.
Credit analysts Standard & Poor's likewise sees worrisome signs. "The prolonged slump in housing in some states may be taking a more significant economic toll than we had expected," according to an Aug. 6 Standard & Poor's report. Slowing real estate and construction markets also are pinching Arizona, Minnesota and Virginia budgets.  
NCSL found that states ended fiscal 2007 with $54 billion in their coffers - down from the $58 billion of the previous year. That total is likely to be even lower since the report excludes four big states still working on budgets: California, Illinois, Michigan and Wisconsin. North Carolina also is not reflected in the report since it just recently wrapped up its budget. NCSL projects balances to drop again in fiscal 2008 to $41 billion.
Maryland Del. Sheila Hixson (D), attending NCSL's annual conference in Boston, expects her state to be among the first to show the signs of a nationwide economic slump, due to rising energy prices and the massive costs of infrastructure needs. The state is facing a $1.5 billion gap between revenues and spending and will likely have to raise taxes to make up the difference.
Other states facing faltering revenues this fiscal year are California ($1.4 billion), Illinois ($874 million), Massachusetts ($1 billion), Michigan (at least $1.6 billion) and Virginia (up to $300 million), according to Sujit M. CanagaRetna, a state tax expert for the Council of State Governments.
Renewed interested in repairing the country's ailing infrastructure prompted by last week's Minnesota bridge collapse also poses huge challenges to state budgets. "We've been deferring maintenance, balancing the budget by deferring the maintenance for a long time now and we've got to fix that. It's just stupid," said David Wyss, chief economist for Standard & Poor's said during NCSL's conference in Boston.
Other looming big-ticket items are health care and pension benefits for retiring state workers and overall rising health care costs. Medicaid, the state-federal health care program that covers 59 million disabled or low-income children and adults, is budgeted to grow 8.1 percent, NCSL said.
States have been on a spending spree for the past two years. Minnesota last year doled out $522 million for a new baseball stadium for the Minnesota Twins while this year Alabama forked over $400 million in tax breaks and other incentives to land a German steel mill.
At least 20 states this year boosted K-12 education funding while 19 states socked away money in reserve funds, NCSL said. Only 10 states used extra funds for highway projects.
 
Once again, states were leery of raising taxes. States cut personal income taxes by $702 million and sales taxes by $522 million, but increased health care provider and industry taxes by $305 million and tobacco taxes by $777 million.
States continue to be inventive when it comes to raising fees. States expect to rake in $700 million from higher fees in fiscal 2008, compared with $81 million that was raised in fiscal 2007. Virginia bumped up vehicle registration fees and is slapping higher penalties - up to $3,000 - on in-state drivers for repeat traffic violations while Texas instituted an "admission fee for customers at sexually oriented businesses," the report said.