This year, 25 states are facing or have addressed revenue shortfalls and more states expect mid-year revenue shortfalls than in any year since 2010, according to the National Association of State Budget Officers.
The mid-year revenue shortfalls and resulting budget problems — some of which are due to state policymakers’ own ill-advised tax policy choices — that states are facing in 2017 appear to be the first signs of continuing problems, according to an analysis by Center on Budget and Policy Priorities. More than half the states lack the revenue needed to maintain services at existing levels in 2018. All told, two-thirds of the states are facing or have addressed revenue shortfalls this year, next year, or both.
Despite the continued national economic recovery, state revenue growth is slowing for a number of reasons, including, CBPP said. These include:
- Falling energy prices. States with energy-based economies have seen energy-related taxes plummet as oil prices have dropped. States with the greatest reliance on energy taxes like Alaska, Louisiana, Oklahoma, and West Virginia have struggled with budget problems since oil prices began to fall in 2014.
- Tax cuts. Costly and ill-advised tax cuts enacted in recent years are suppressing some states’ tax collections. For example, 11 states have enacted large, phased-in tax cuts since 2011 that will cost a combined $8 billion a year once fully implemented.
- Stock market growth. Sluggish stock market growth in 2015 and the beginning of 2016 slowed income tax collections. Twenty-three states reported declines in estimated income tax payments in January compared to the prior year, according to the Rockefeller Institute of Government. (Estimated tax payments are made by taxpayers who receive income like capital gains from stock sales that are not subject to withholding like wages.)
- Slower-than-average sales tax collections. Despite the economic recovery, sales tax collections are below their historical average as consumers have remained cautious long after the end of the recession and untaxed Internet sales have continued to grow.
The prospect of changes to the federal tax system, as President Trump and congressional Republicans intend to propose, could also have major state revenue implications. Most state income taxes are based on federal definitions of income. Increases in certain deductions, such as allowing immediate expensing of the full cost of investments, could result in state revenue losses. The elimination of the federal estate tax could make it more difficult for states with estate taxes to retain them.
To cope with revenue slowdowns states should avoid ineffective tax cuts and incentives that would deplete revenues and worsen budget problems, CBPP said. Several states have enacted or considered deep income tax cuts that give the largest benefits to large, profitable corporations and the highest-income people. Such proposals not only typically fail to produce the promised economic benefits but also squander revenue that states could otherwise use to lay a strong foundation for future economic growth by investing in high-quality schools, infrastructure, and the like. They also make it harder for states to save for a rainy day or respond to changing circumstances.
Info: https://goo.gl/6Zf5ER (report).