States are riding a revenue roller coaster

March 7, 2013

This chart from Moody’s provides a clear picture of the swings in revenue that states have experienced over the last 12 years. Even with big changes in revenues, states must end every year with a balanced budget. It’s truly a feat of magic given the spending demands of states with education, Medicaid and pension payments leading the priority list.

Although state revenues have increased since 2010, there are still warning signs sprouting here and there. Moody’s wrote in a recent report:

Moody’s Investors Service continues to have a negative outlook on the US states sector because of uneven employment and tax revenue growth and spending pressures from Medicaid and pensions, despite signs of economic stabilization across the country. Repercussions from possible reductions in the federal deficit, which could damage economic growth, are also a risk for states.

“Despite these risks, the US states sector is supported by broad and diverse economies, low debt burdens compared to other global sectors, and strong fiscal flexibility to mitigate economic risks,” says Moody’s Lyons.

The Rockefeller Institute noted that although fourth quarter of calendar year 2012 (second quarter of fiscal year 2013) revenues were strong, they are unlikely to continue through this year:

The rapid income tax growth in the fourth quarter is consistent with the caution in the most recent State Revenue Report: “Year-end actions by taxpayers to minimize their expected federal tax liability in light of the ‘fiscal cliff’ and federal actions to avert the cliff are likely to boost state income taxes in the October-December quarter and in the first and second quarters of 2013, lifting state tax revenue in the 2012-13 state fiscal year. However, these year-end actions are likely to depress state income tax revenue slightly in 2013-14 state fiscal years…

…States are on a revenue roller coaster, and there is a bumpy ride ahead. It will be hard for states to interpret revenue data in coming months, and hard to rule out the possibility that any short-run revenue surge is simply borrowed from the future. It will be tempting to treat unexpected revenue growth as a sign of continuing economic improvement, when it could mean instead that future revenue will be lower. Caution should be the watchword.”

California experienced a strong increase in tax receipts (up 39 percent from estimates in the governor’s proposed 2013-14 state budget) for January 2013, but state controller John Chiang cautioned:

“Last month’s revenues were by far the highest that California has seen in any January for the past decade. Along with increased auto sales, rising home values, and more construction, it signals that California may be entering an era where we can govern outside of crisis,” Chiang said. “However, given our state’s troubled history with boom-or-bust revenue cycles, this good news must be tempered with increased fiscal discipline in how we interpret and budget January’s collections.”

Conditions seem a little better for state budgets, but there are still many cross-currents. As the author of the Rockefeller Institute report said, “caution should be the watchword”.

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