State Budgets Get Breathing Room

In another sign that the economy may be at last improving, 29 states expect to end the current fiscal year with small surpluses, a new report shows.

And 21 states predict by 2013 to bring in the amount of tax revenue that they did before the recession started, says the latest 50-state data from the National Conference of State Legislatures. Some states, though, will take at least three years to return to their peak revenue collections, the report says.

For the first time in four years, most state lawmakers started their legislative sessions without having to dig out of a budget hole. Only nine states had to close gaps for their current 2012 budgets as they began work on their 2013 budgets that for most states start July 1, according to NCSL.

For 2013, 34 states had no budget gaps at all, while 16 states and Washington, D.C. have projected shortfalls totaling more than $16 billion. Much of that comes from a few states: California, with a projected $5 billion deficit, followed by New York, which has already patched a $3.5 billion hole and Texas with a $2.3 billion gap, according to the report. Illinois reported that it would not have a budget gap for 2013, but NCSL notes the state will have nearly $8.5 billion in owed bills at the end of that fiscal year.

Alaska was looking to end the current fiscal year with a nearly $2 billion surplus, but that projection was made back in the fall and recent high oil prices have undoubtedly increased that surplus. Indiana estimated a nearly $1.8 billion surplus, which triggered a taxpayer refund and more money for the pension fund, the report said. Most states with extra money anticipated putting it in their rainy day funds or carrying it forward into 2013. 

“Even though the economic outlook in the states is improving, tax collections across all categories remain uneven,” William Pound, NCSL executive director, said in a statement. “And that’s one reason why state lawmakers are still uneasy.”

Some states are still in tough spots. Michigan, which was in a recession long before the nation was, doesn’t expect revenues to return to peak revenue levels until 2018. For California, it’s 2017. North Dakota is the only state where tax collections never fell on a year-over-year basis, NCSL noted.

Among the reasons that states remain cautious about their budget outlooks are stubbornly high unemployment, concerns about Europe’s economy and looming cuts to state programs from Congress.

NCSL’s findings dovetail with a report last month from the Rockefeller Institute that found states’ tax collections overall grew for the eighth straight quarter at the end of 2011 and for the first time topped peak revenue levels seen at the beginning of the Great Recession in 2007.

The Rockefeller Institute also reported that local governments, however, are not faring well. Local tax collections had remained strong for most of the period during and after the recession, but trends are shifting due, in part, to the lagged impact of falling house prices on property tax revenues, according to the report. Local property tax revenues grew by a modest 0.6 percent in the fourth quarter, but declined in inflation-adjusted terms.

“Services and functions that are largely funded by local governments, such as education and public safety, are likely to be under severe fiscal pressures for some time if current trends continue,” Lucy Dadayan, the report’s author, wrote.