JULY 7, 2017 — There could be some difficult times ahead for state and local governments, according to an analysis by the National Association of State Budget Officers.
There certainly have been some high-profile budget conflicts across the nation. New Jersey and Maine both recently reached deals to end brief government shutdowns. Connecticut’sGeneral Assembly and governor are still deadlocked over how to deal with a structural deficit due to mounting debt and pension costs.
Then there is Illinois. The state has seen its debt rating cut to one notch above junk status — a record low for state governments — racked up more than $15 billion in unpaid bills and had not passed a full budget for two years. The latter changed Thursday as the House followed the Senate’s lead in overriding Republican Gov. Bruce Rauner’s veto of a budget package that includes a 32 percent increase in the personal income tax rate and a 33 percent increase in the corporate tax rate. The budget still fails, however, to address the 800-pound gorilla in the room: Illinois’ substantial unfunded pension liabilities.
The increasing frequency of midyear budget cuts and lagging tax revenues have been a theme for many states, and both indicators are now at levels not seen since the Great Recession and its immediate aftermath, which should give lawmakers and governors serious pause.
In fact, NASBO reports, 23 states made midyear budget cuts during the fiscal year — a “historically high number outside of a recessionary period,” and up from just eight in 2014. Moreover, 33 states missed their revenue projections in fiscal year 2017, which just ended on June 30 — the highest number since 36 states came up short in 2010.
“The number of states making midyear budget cuts tends to rise in advance of a recession,” an article from The Hill ominously observed. Similarly, “The last three times revenues dipped preceded economic recessions in 1991, 2002 and 2008.”
“Coming out of two consecutive years of widespread weakness in tax collections, states are approaching fiscal 2018 with caution,” the NASBO report concluded. “Looking ahead, budget conditions are likely to remain tight as states contend with rising spending demands for pensions, health care and other fixed costs; modest revenue growth; and federal uncertainty, while they also work to bolster their savings accounts to prepare for the next economic downturn.”
Preparing for the next economic downturn is certainly prudent advice. Yet, given all these glum figures, it is curious to see that the U.S. Census Bureau recently released data showing that state and local individual income taxes — generally states’ largest revenue source, except, of course, for the nine states that do not impose taxes on one’s wages — broke last year’s record for collections received during the quarter that ended March 31.
If states are pulling in record levels of taxes and still are not meeting their optimistic (some might say greedy) projections, something is seriously wrong. Too many states have continued their spending and debt binges, sustained by ever-increasing taxes. A quick reversal of spendthrift fiscal policies is needed in order to avoid a rather rude awakening come the next recession — which, if the NASBO data are any indication, may arrive sooner than we think.