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State Governors Report Rise In Tax Revenues

by Leroy Baker, Tax-News.com, New York

11 July 2005

State tax revenues increased significantly last year as the recovering US economy generated more sales of goods and services and provided more income for individuals, according to the latest report by the National Governors Association (NGA) and the National Association of State Budget Officers (NASBO).

The Fiscal Survey of States report found that the revenue situation "improved dramatically" during fiscal 2005 and both associations expect the trend to continue in the current fiscal year. However, in the longer term, continued pressure on state finances from a backlog of expenditure demands and health care costs will mean that states will continue to face budgetary challenges, the report warned.

In fiscal 2005, revenues exceeded original budget projections in 42 states and three others met their target. Only five states' revenue was below their budget projections. Projections indicate that revenues will be up by an additional 5.2% in fiscal 2006. This includes 17 states, which have proposed net tax and fee increases totaling $2.4 billion with the largest a $982.7 million increase in cigarette and tobacco taxes. Governors also proposed a decrease of $366.3 million in personal income taxes.

Nonetheless, despite "extensive cost containment" by state governments, the NGA and NASBO said the Medicaid expenditures are now a larger component of state budgets than education and continue to outpace revenues.

"The continued rise in health care costs, spurred on by Medicaid, continues to throw a wrench in the recovery of states to emerge from the recent fiscal crisis," observed NGA Executive Director Raymond C. Scheppach.

"Medicaid continues to be the major driver of state spending, and it will continue to cut into other state budget priorities like education and economic development," he warned.

While state finances continue to improve, state expenditures also have increased after several years of flat growth. State spending grew at 6.6% in fiscal 2005 and is expected to grow 3.8% in fiscal 2006. The annual average since 1979 - the year the Fiscal Survey first began tracking budget data - is 6.5%. This compares to an average over the last five years of only 3.9%.

Scott Pattison, executive director of NASBO added: "Our study shows that states' fiscal situations continue to emerge from the lingering strain from previous years."

"As states look forward to 2006, governors are facing revenues that will likely perform above estimates, less profound expenditure growth, and a decline in total balances."

The full text of the Fiscal Survey of States Report can be found in the Tax News Resources section.

 

 






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