State Budgets: First, The Bad News

Those who follow state finances might well have been enthralled by the tales of several states without budgets as of fiscal 2018 – particularly Illinois, which went 736 days before it actually passed a budget, making the front page of the New York Times

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But those finance fiends in glass houses shouldn’t throw stones, writes Tax Policy Center’s researchers and staff. We could be next.

First the bad news. Illinois was the only state to go two years without a budget but it was far from the only state to miss a fiscal deadline. According to the National Conference of State Legislatures, 10 states failed to pass budgets by the start of their fiscal year (July 1 in most states) and six of those states still have not done so. …

And the problem goes well beyond blown deadlines. State revenues are not meeting projections across the country despite a growing economy. In fiscal 2017, general fund revenue came in below forecast in 33 states. Income tax revenue is lower than anticipated in part because people may be delaying some capital gain realizations while they wait for federal tax cuts. Sales tax revenue is also sluggish, mostly because people are consuming more untaxed services and making more online purchases (which are technically taxable, but if the seller doesn’t collect the sales tax buyers rarely pay the use tax). ….

Meanwhile, states must contend with the rising costs of many government services. Underfunded public pensions, a big problem in Illinois and several other states, complicate the fiscal politics. And some states have made those problems worse by passing tax cuts they could not afford.

These trends are causing budget headaches in all 50 state capitals. …

Adding to these ongoing state budget problems: the federal government. Congress has not passed any major legislation yet, but many of the ideas on its agenda would kick huge budget questions to the states. How do states respond if Congress cuts the federal contribution to Medicaid? What if Congress repeals the state and local tax deduction? And many of the president’s proposed budget cuts—such as food stamps—would land hard on the states.

Great. So what’s the good news?

….so back to Illinois. That state exacerbated its own budget problems in 2015 when it let a temporary personal and corporate income tax hike —used to plug a previous budget hole— expire. Without the revenue, the state struggled to pass a budget. So this year, the legislature roughly restored the higher tax rates, and made them permanent this time. …

While few politicians want to raise taxes, many states are learning that tax cuts are no panacea. State economic development depends on good infrastructure and workforce development. Families and employers want quality schools. And numerous private and public groups (including local governments) depend on state funding.  …

[L]egislators are starting to recognize fiscal realities, including the state of the national economy and ongoing efforts to cut federal spending. Increasingly, state lawmakers are taking tough, but prudent, votes even at the risk of defying an executive of their own party.

Nothing says “good news” like increasing taxes.