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States slow spending growth amid early signs of economic slowdown

States slow spending growth amid early signs of economic slowdown
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State governments are reining in spending as early signs of an economic slowdown begin to impact revenue levels, according to a new report.

State spending grew by an estimated 4 percent in the fiscal year that ended in July, the National Association of State Budget Officers (NASBO) found, 3 points lower than the previous fiscal year. The drop comes as growth of the two largest sources of state revenues slowed, and as federal money sent to states to bolster the economic recovery and healthcare spending trickled off.

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States spent an estimated $1.93 trillion in 2016, the NASBO report found, up from $1.85 trillion in fiscal 2015 and $1.73 trillion in fiscal 2014.

California’s budget is the largest in the nation: The state spent $265 billion in the last fiscal year. New York spent $150 billion, and Texas spent $127 billion. South Dakota’s government spent just more than $4 billion, the lowest figure in the nation. Seven states — Rhode Island, Illinois, Wisconsin, Wyoming, Alaska, Nevada and Oregon — spent less in fiscal 2016 than they did in the previous fiscal year.

The recession that hammered the national economy sent state budgets into a tailspin of budget cuts, though state spending on Medicaid has grown dramatically. The majority of the money states spend on Medicaid comes from the federal government.

At the beginning of the recession, Medicaid made up less than 21 percent of total state spending; last year, that share grew to 29 percent, driven in large part by federal dollars aimed at states that agreed to expand Medicaid under the Affordable Care Act.

Education spending remains the largest line items in state budgets. States dedicated an estimated 35 percent of their general-fund spending to elementary and secondary education, and another 9.7 percent to higher education in the past year.

At the same time, states have seen slower growth in their own revenues. Personal income tax collections grew just 2.9 percent in 2016, sales taxes grew 3.2 percent and corporate income tax receipts fell by 5.8 percent.

Budget officials said states received lower tax collections in April 2016, what they dub the “April surprise,” thanks to a slow-down in the stock market during the 2015 calendar year. The year before, a booming market meant higher than expected tax collections.

Falling oil and natural gas prices hurt states’ bottom lines, too, especially in places such as North Dakota, Wyoming, New Mexico and Alaska, which rely heavily on severance taxes to bolster their budgets.

The NASBO report forecasts modest growth in future state budgets, assuming national economic trends hold.