State Budgets Continue to Grow, But Less Than Expected

The long budget season in state legislatures is finally over, with Massachusetts and North Carolina rounding out the pack as the last states to enact a budget for fiscal year 2015, which for 46 states began on July 1. While the process is arduous, it serves as an effective measure how well states, and the nation as a whole, are doing economically. According to a recent nationwide summary of state finances by the National Association of State Budget Officers, or NASBO, while growth has been slow in most states, overall they are doing well. Expenditures in all 50 states are expected to increase by 2.9 percent over fiscal year 2014, marking the fifth straight year of growth following two straight years of decline following the great recession. While positive, this level of growth is considered sluggish compared to the 5 percent increase projected earlier in the year.

The continued growth in state budgets has been a direct result of overall increases in state revenues, with most states meeting or exceeding their budget forecasts for the year. According to NCSL, nine states including California were expected to exceed their budget forecast for the year; thirty-six other states were expected to meet their forecasts while seven were doubtful to do so. Twenty-two states will go over their expected budget for FY 2014.

A result of this continued positive growth in both state budgets and state revenue collection has led to a trend towards cutting taxes and fees, with those states making such cuts claiming them a way to further spur economic growth and pass some of this prosperity along to the citizenry. Overall, states have enacted $2.5 billion in tax and fee cuts across the board. This, however, has not always led to the anticipated results.

North Carolina, as a result of recently enacted tax cuts, was unable to meet its revenue forecast. Kansas is anticipating a major budget shortfall due to a now deeply unpopular tax cut package spearheaded by Republican Gov. Sam Brownback. These cuts, which Governor Brownback was elected campaigning on, may now see him ousted from office during the upcoming November elections in protest of these policies which have ravaged the state’s finances and economic outlook. The state is expected to have a $238 million budget shortfall by 2016, with deep cuts expected across the board. Kansas may well serve as a warning to other states that may be contemplating tax cut packages ahead of the 2015 legislative session.

NASBO has warned that while the outlook for states currently remains stable, this may not hold true long-term, as continued sluggish growth will likely create difficult budgetary choices in fiscal 2015 and beyond, since the current level of revenue growth may not be sufficient to cover continually increased spending in areas such as health care and higher education. With the 2015 legislative season only a few months away, all 50 states will once again need to begin the difficult budgetary process, and would be wise to keep the long-term view in mind, while heeding the lessons learned from Kansas.