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US State Governments Awash With Cash

by Mike Godfrey,, Washington

20 April 2007

Robust revenue performance and stable spending levels mean states' budgets continue to be strong, although sales and use tax collections are causing some concerns, according to a new report by the National Conference of State Legislatures.

The report, entitled 'State Budget Update: March 2007,' includes the results of a national survey, which showed that state legislators in 42 states have unexpected funds to work with as they approach the end of their budgets for fiscal year (FY) 2007, and craft their budgets for FY 2008.

"The current budget situation is giving states an important and much needed window of opportunity to restore and reinvest in state programs," observed Texas Senator Leticia Van de Putte, NCSL's president. "More money to work with also means more ability to innovate. Arkansas, for example, will use additional funding to build a new cancer research center. Many states are putting more dollars into higher education. Some states are saving, and still others are providing tax relief."

State legislative fiscal officers attribute this situation to higher-than-expected revenues and stable spending needs. In FY 2007, most states took in more money than officials predicted from personal income and business taxes. Of the 41 states that levy a broad-based personal income tax, 22 reported that collections were above forecast levels in late February. And in 26 states, corporate income and other business taxes exceeded expectations.

But sales and use taxes did not perform as well. Of the 45 states that levy a statewide sales tax, 11 reported that collections were above forecast. Sixteen reported collections on-target or close-to-target. And 14 states reported collections below target.

On the other side of the ledger, spending plans have held relatively firm. Although the number of states with spending overruns has increased since NCSL's last state budget update in November, the overages appear modest in most states. And 17 states have avoided budget overruns so far in FY 2007.

Many lawmakers are deciding how best to use unexpected resources. At least a dozen states are considering tax cuts. Alabama is looking at reducing sales and income taxes. Florida, Minnesota, Montana, North Dakota and Texas may provide property tax relief. New Mexico passed an earned income tax credit and North Carolina is considering one. Utah reduced business taxes.

Several states, including Arkansas, Vermont and Virginia, will fund one-time projects. Some states are putting additional dollars into their FY 2007 budgets to resolve overruns or support more programs. Transportation projects and other capital expenditures are popular targets for extra revenues. Many states will reduce unfunded pension liabilities or will put money into state retiree health care.

At least nine states are stowing portions of their unexpected funds in rainy day or other savings accounts, which may limit how the dollars can be used. These states are Colorado, Connecticut, Georgia, Mississippi, Nebraska, New Hampshire, New Mexico, Oklahoma and Oregon.

Other states, including Arizona, California, Florida and South Dakota, plan to carry extra revenues into FY 2008 to hedge against unforeseen circumstances or slowing revenue growth. Slipping sales and use tax collections in several states are causing concern about future performance.

"Our sales tax collections in March actually went negative, dropping 3 percent from the same period one year before," reported Warren Deschenaux, director of Maryland's Office of Policy Analysis. "We're concerned because sales tax performance was a leading indicator of fiscal problems the last time we went into an economic downturn."

The release of this report comes while state legislators and staff members are meeting in Washington, D.C., to hone their federal lobbying priorities at NCSL's Spring Forum. High on states' wish list is a curb on unfunded federal mandates, which strain state budgets by billions of dollars.

"The strengthening economy has helped states balance their budgets since the recession of the early part of the decade. It has also given some the opportunity to boost rainy day funds, plug holes in programs, consider tax cuts and even explore new ideas," said NCSL Executive Director Bill Pound. "But states face $31 billion worth of federal unfunded mandates and cost-shifts, which could easily upset budgets that are stable today, particularly in the implementation of the new national driver's license standards required by the Real ID Act."

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