Slow revenue growth worries cash-strapped states

Slow revenue growth worries cash-strapped states
© Getty Images

State tax revenues grew by a startlingly weak 1.2 percent in the last fiscal year, raising concerns among legislators and economists that states are in for a new round of painful budget cuts.

States have collected progressively more tax revenue for six consecutive years since the nadir of the recession, when worsening economic conditions blew big holes in budgets. But the robust growth of 2015, when revenues increased by 4.7 percent, has fallen as corporations report fewer profits and personal income and sales taxes stagnate.

Personal income taxes grew by just 0.2 percent over the last year, when adjusted for inflation. Sales taxes grew by just 0.9 percent in the same period. 

ADVERTISEMENT

Together, those two taxes represent about two-thirds of state revenues, according to the Rockefeller Institute of Government at the State University of New York. The anemic growth rates pale in comparison to historical norms, which have been closer to 4 percent annually.

“Tax revenue growth is slow, and states are having a hard time providing services their citizens want, particularly given rapid growth in some costs that don’t buy you new services,” like pensions, said Don Boyd, an author of the new Rockefeller Institute report. 

Boyd blamed weak performance in the stock market for the lack of personal income tax growth. Sales taxes, too, were impacted by economic weakness at the beginning of last year. More recent shortfalls in personal income tax returns reported in the last few months may reflect uncertainty about the Trump administration’s plans to reform and overhaul the federal tax code, he said.

Energy-producing states have been hit hardest by a global decline in commodity prices. Severance taxes, levied on oil and gas producers, declined 40 percent between 2015 and 2016. That translates to a loss of more than $5 billion, concentrated in states that depend heavily on oil and gas to bolster their budgets.

North Dakota has experienced both the benefit of high oil prices and the shock of the more recent collapse more than any other state. Even at the height of the recession, North Dakota’s economy buzzed to new heights, fueled by a resurgent energy industry that filled state coffers. 

Now, as low oil prices make fracking less economically attractive, less production means less revenue — including lower sales and income tax receipts. The state collected $3.7 billion in the last fiscal year, down a whopping 35 percent from the year before.

Wyoming’s tax collections dropped nearly 19 percent from a year before, as energy producers closed up shop to move elsewhere. Oklahoma and New Mexico both saw declines of more than 9 percent, and Montana and West Virginia experienced 7-point declines.

There are some signs of hope that the downturn may be only temporary: A new jobs report released Friday by the Bureau of Labor Statistics showed hiring returning to a robust pace, even though wages remain stagnant. As the economy continues to rebound, and as the stock market grows, state budgets stand to benefit.

But across the country, legislators finalizing state budget plans ahead of the beginning of the next fiscal year in July are already grappling with projected shortfalls. 

In Oklahoma, Gov. Mary Fallin (R) has proposed a raft of new taxes on everything from tattoos to low-alcohol beer and rental cars, aimed at raising $340 million. Alaska legislators have proposed restructuring the state’s Permanent Fund, which would make up most of the $2.7 billion deficit the state faces next year.

Connecticut legislators returned to the Capitol in Hartford on Monday for the beginning of another round of tough budget talks, which could lead to as many as 1,000 state employees being laid off. Gov. Dan Malloy’s (D) office has estimated the state faces a $2.3 billion deficit next year, and a higher deficit the year after.

Even states that have seen decent revenue growth are struggling to close budget gaps. Oregon legislators have to find $1.6 billion in new funds, after a year in which tax revenue grew by 4.4 percent. A bipartisan group of negotiators is debating a combination of budget cuts and tax increases to close that gap.