Amid State Surpluses And Tax Cuts, Slowdown Looming?

Tax-cut advocates are having a field day in statehouses around the country, emboldened by the lengthiest economic boom in U.S. history.

Thirty-six states closed out fiscal year 2000 with surpluses greater than 5 percent of their annual budget, a target recommended by Wall Street analysts, according to the National Conference of State Legislatures. Of the 36 aforementioned states, 18 had budget surpluses exceeding 10 percent.

That set the stage for lawmakers and budget officials to lower taxes by $9.1 billion in 2000, the largest reduction recorded in the 15 years NCSL has compiled annual fiscal-year reports on the states. The record tax cuts come on the heels of a $7.3 billion reduction last year, $7.1 billion in 1998, $2.6 billion in 1997 and $4 billion in 1996.

The $9.1 billion figure for 2000 was possible due to an aggregate $38.5 billion surplus that states had in their general funds and rainy day funds, according to NCSL. That $38.5 billion represented 8.8 percent of state FY 2000 general fund spending. “Reserves for the last two fiscal years, as a percentage of state expenditures, are at their highest levels in 20 years,’ says NCSL fiscal specialist Arturo Perez.

A few states are seeing signs their economies are slowing, notably Virginia and South Carolina, prompting some financial experts to predict that a large-scale slowdown probably isn’t far off. But even the projected rates of revenue decline for Virginia and South Carolina still leave them in sound financial health.

With so many states showing hefty FY 2000 budget surpluses, legislators and budget officials have utilized tax rollbacks, tax holidays and even eliminated some levies, says Patrick Casados, a spokesman for the National Association of State Budget Officers.

“I think people were really expecting that the economy was going to slow down a lot more than we’ve seen,” says Casados, whose association is in Washington, D.C. “States are doing well, although fund balances are beginning to slow down.”

The reason for shrinking fund balances — money left over after states pay their expenses — can be traced directly to tax cuts, Casados adds.

The biggest cutters this year were Hawaii, which engineered a 8.4 percent drop in revenue collections, Minnesota, 8.3 percent and Washington, 6.9 percent, NCSL says. In all, 17 states cut 2000 taxes by 1 percent or more compared with 1999 revenue collections.

Three states that bucked the tax-reduction trend and approved significant increases were Louisiana, Oklahoma and Alabama.

To achieve a snapshot of the states’ end-of-fiscal-year health, NCSL reviewed FY 2000 data from every state except Massachusetts, which hadn’t passed its budget when NCSL finished its study.

Forty-six states have fiscal years that ended June 30. The exceptions are Alabama and Michigan, whose fiscal years end in September, New York (March) and Texas (August).

When it comes to state spending, the biggest benefactor of the booming economy has been education, according to NCSL. Education outpaced every other budget category in terms of appropriations growth, although that picture has changed for FY 2001. Funds for Medicaid and education are scheduled to grow at 6.7 percent over 2000 spending levels, NCSL says.

“Medicaid is definitely back in the picture for many states,” says NCSL’s Perez. “It seems to have popped back up on radar screens, given some of the cost increases associated with health care.”

A few states continue to flounder despite the good economic fortunes most enjoy. One is Tennessee, which recently had its bond rating lowered by Wall Street. Republican Gov. Don Sundquist attempted and failed to overhaul the state’s tax collection system during the 2000 session. According to one estimate, Tennessee could be facing a $100 million shortfall by October.

“We have a real problem,” Sundquist told the Nashville Tennessean . .”We have a good economy in Tennessee, but we have a tax structure that does not produce the revenue we need.”

Louisiana is another state that weathered economic doldrums during FY 2000.

Then there are a few states that see slight downturns in their economic health, but expect to remain in robust fiscal condition.

The governor of Virginia, where Internet businesses have brought about three consecutive years of double-digit revenue growth, recently told the Washington Post he expects an economic slowdown over the next 18 months. But even that forecast by Republican Gov. James Gilmore and his economic advisers underlines the economy’s strength: Gilmore merely foresees a drop to a moderate 5.5 percent revenue growth rate, instead of double-digit increases.

Maryland is another state where a white-hot economy has cooled to merely red-hot. The Free State had a budget surplus of about $100 million at the end of FY 2000, compared to a surplus of nearly $1 billion last year, the Baltimore Sun reports.

South Carolina wound up with a surplus that was $61 million less than anticipated, closing out its FY 2000 with $206 million, Comptroller General James Lander told The State newspaper in Columbia. “The state of South Carolina is in excellent financial shape,” Lander said. “The fact that we had less of a surplus this year than last indicates a cooling of the economy.”

John Petersen, a director with the Arlington, Va.-based Government Finance Group, has arrived at the same conclusion. “It’s been such a heady time, (but) things are not moving as quickly as they were the last two years,” Petersen says. “Theoretically, at least, we’ll be seeing a slowdown.”

Texas is experiencing a downturn, but not because its economy has cooled. Rather, the state’s $610 million shortfall can be traced to prison costs and unanticipated Medicaid spending, Republican Lt. Gov. Rick Perry said in a Dallas Morning News article. Perry predicted the shortfall could easily be absorbed by Texas’ budget surplus, and added that $1.8 billion in tax cuts authorized by Texas Gov. George W. Bush during 1999 weren’t to blame.

In practically every other state, however, the good economic times continue to roll. Among states pleasantly surprised by their FY 2000 revenue collection activities:

• Illinois, which had a $1.5 billion balance on June 30, the state’s highest ever.
• Wyoming received $546 million, compared to a projected $486 million.
• Utah racked up a $118 million surplus, the state’s biggest in more than a decade.
• Higher natural gas prices enabled Oklahoma to collect $200 million more for 2000 than for 1999.