States’ wallets get thinner

A slumping housing market and skimpier sales tax collections will force as many as 20 states to go back and patch holes in their budgets in 2008, the nation’s governors reported Wednesday (Dec. 5).

Most states will muddle through the current economic slowdown, but if the country dips into a recession, then even more than 20 states likely will have to make cuts to their current budgets, Raymond C. Scheppach, executive director of the National Governors Association predicted. “Clearly, it’s a little more gloomy than it was once was,” Scheppach said as NGA and the National Association of State Budget Officers released the latest state revenue numbers.

The stalled housing market is pinching states across the board, but it’s more severe for states such as Arizona, California, Nevada and Florida that rely heavily on real-estate taxes, Scheppach said. A drop in home sales and prices mean states take a smaller cut – both in real-estate-related and sales taxes as most people who buy homes also purchase new appliances and carpeting and spend big money on home improvements. Florida, for example, is particularly dependent on sales tax revenue because it does not have a state income tax.

California is struggling to plug a projected $9.8 billion deficit for 2008-2009, while Florida is looking at a $2.5 billion estimated budget shortfall. Other states facing shortfalls include Maine, Michigan, New Hampshire, Oklahoma, Kentucky and Virginia.

Unlike the federal government, which can run a deficit, states must balance their books. That means if tax revenues come in less than what a state had projected, then a state either has to cut programs or find other sources of revenue. The fiscal year begins July 1 for all but four states (Alabama, Michigan, New York and Texas).

Scott D. Pattison, executive director of the National Association of State Budget Officers, said the report shows that “most states are moving from peak fiscal conditions to a period of much slower spending and revenue growth.”

State spending is budgeted to grow a modest 4.7 percent in fiscal 2008. That’s far below the robust 9.3 percent growth states saw in fiscal 2007 and even lower than the 30-year average of 6.4 percent.

States in 2008 also will have less money in their reserves than in the previous two years. After three years of bulging coffers, state balances collectively are projected to fall to $47 billion in this fiscal year, compared to nearly $63 billion the year before and a record $69 billion in fiscal 2006, according to the report.

“States’ fiscal health was so strong in the ’06-’07 period that they could have had no problem running the Marine Corps Marathon, but now we are starting to see some sluggish growth. … I think states can do a walk-run of a 10K, but not necessarily at the peak that they could run a marathon,” Pattison said.

On balance, tax cuts are becoming less prevalent. Twenty-four states cut personal income taxes by $1 billion in fiscal 2008, but eight others raised cigarette and tobacco taxes by nearly $762 million, resulting in an overall tax cut of $115 million, according to the report. In comparison, states last year cut taxes and fees by $2.1 billion – the first time tax cuts outweighed increases nationwide since the economic boom of the late 1990s through 2001.

“Fiscal Survey of States” provides an annual snapshot of states’ finances. The 23-page report features state-by-state data including tax cuts and increases, preliminary figures for fiscal 2007 and projected year-end balances for 2008. The data were collected this fall.

Spending on Medicaid, the federal-state venture that provides health insurance to the poor, accounted for nearly 22 percent of all state spending in 2007, followed by K-12 education (21 percent); higher education (10.4 percent), transportation (8.1 percent), corrections (3.4 percent); public assistance (1.8 percent) and all other expenditures (33.4 percent).