States Begin to Convene for 2014 Sessions, Focus on Fiscal Outlooks

Lawmakers in 46 states will start returning to their respective capitols this month to debate the year’s pressing policy issues, most dominantly taxes and spending, healthcare, education, immigration, energy and election reform.

Legislators once again be tasked with preparing budgets in a climate of fiscal austerity; state are still struggling to recover from the recession. Program growth will be small and new taxes rare; it is after all an election year.

The National Association of State Budget Officers (NASBO) issued a cautionary report late last year, they found:

“The growth in revenue collections is expected to substantially slow in fiscal 2014, and the national economic recovery remains relatively weak. The unemployment rate is still high in many states, and economic expansion is slow. This means that states still face continued spending demands in critical areas directly affected by the sluggish economy including Medicaid, higher education, corrections and aid to local governments.”

Revenue performance in the states so far this fiscal year is mixed.  States that rely heavily on personal income taxes, especially progressive income taxes, appear to be benefiting from the strong stock market performance to boost revenues from wealthy taxpayers.  For example, California income taxes were $1.6 billion (20 percent) above forecast in December.  In Minnesota, the income tax was largely responsible for a $1 billion upgrade in the state’s revenue forecast for the FY15-16 biennium.  Both of these states recently enacted tax increases that targeted high-income citizens.

States that rely heavily on the oil and gas industry also continue to see strong revenue performance.  Texas ended the last fiscal year with a large surplus and expects an even larger, $8 billion surplus at the end of this fiscal year.  North Dakota is also seeing a massive boom in state revenue thanks to the discovery of oil fields in 2006 and the successful use of hydraulic fracturing. The state of about 700,000 is currently projecting a $1.6 billion surplus at the end of this fiscal year.

Other states are not enjoying such robust revenue growth.  In Tennessee, while collections were up by nearly four percent this fiscal year over last, they are still short of budgeted projections. Pennsylvania was barely above its fiscal year projections this November, beating them by a meager 0.4 percent.

Despite the mixed economic performance, state spending has risen in each of the last four fiscal years, however spending levels still remain below their 2008 pre-recession levels. Education, Medicaid, transportation and corrections drove the increased spending; this was countered somewhat by an overall decrease in spending on public assistance. The increases were modest and seven states opted to adopt budgets with lower spending in fiscal year 2014 than in 2013.

Despite these spending pressures, the political imperative to cut spending or at least appear fiscally prudent in an election year is strong. Several GOP governors and legislators have already announced plans to further cut taxes during their 2014 legislative sessions.

Legislators in North Dakota, Montana, Nevada and Texas are not scheduled to meet in 2014; these states only meet in regular session biannually on odd numbered years.