Battered State Budgets See Relief in 2005
By Kathleen Hunter, Staff Writer
Legislators in many states this year saw signs that the fiscal storm that raged during the past several years might finally be ending.
The biggest budget news was rebounding revenues. Lawmakers in the vast majority of states saw revenue collections creep out of the red as they drafted their 2006 budgets, after facing revenue shortfalls collectively totaling $235 billion since 2001.
"As their 2005 calendars moved along, there tended to be better and better news for states in terms of their revenue collections," said Arturo Perez, a fiscal analyst for the National Conference of State Legislatures.
States in 2005 increased cigarette and other sin taxes, expanded gaming and sought other means to bring in all possible revenue. One state - Ohio - pioneered a new corporate tax, and another - Alaska - became the first to shift to a 401K-style pension plan for state employees.
A handful of states pursued caps on state spending, while still others - most notably Nevada, sought to provide relief from soaring property taxes.
As of Aug. 12, Michigan's was the only state legislature that still hadn't passed a budget for its 2006 fiscal year, which starts Oct. 1.
The revenue news has been especially positive in states like Arkansas and Montana. Each ended the fiscal year with a record surplus of about $300 million. Arizona ended fiscal 2005 with the highest percentage increase in tax collections in 30 years. Virginia, which last year enacted a comprehensive tax-hike package, closed with a $544 million surplus.
State revenue in 2005 exceeded predictions in 42 states - a turnabout from 2002, when revenue failed to meet projections in 42 states. In only three states - Indiana, Missouri and Washington - revenue collections failed to meet targets for fiscal 2005, a July survey by the National Governors Association and National Association of State Budget Officers showed.
The recovery trend continued in many states during the first month of fiscal 2006. The Arkansas Department of Finance, for example, reported July revenues $10.5 million - or 3 percent - higher than projected.
Only five states - Indiana, Michigan, Missouri, Ohio and Rhode Island - had to plug holes in their 2005 budgets after the start of the fiscal year, down from 37 in 2003, according to NASBO.
Although states budget pressures eased somewhat, the promising revenue picture is only part of the landscape state legislators navigated this year. Medicaid and other health care costs continued to rise along with the costs of public education, leaving state lawmakers with tough choices in their 2006 budgets.
"This revenue increase we see is not an indication that happy days are here again," said Sujit M. CanagaRetna, a Council of State Governments budget expert.
Further complicating matters, spending demands chronically outpace revenue in about half the states, an April 14 NCSL study showed. A shift from manufacturing to a service-based economy only exacerbates the problem by eroding states' tax bases, experts say.
CanagaRetna said state lawmakers explored ways to expand their tax bases to correct structural imbalances.
In Ohio, for example, legislators adopted the first state commercial activities tax, which raises revenue on corporate sales as opposed to profits.
Ohio's tax hike has spurred outrage among anti-tax groups - evidence that raising taxes can "toxic strategy" for states, said CanagaRetna.
In fact, CanagaRetna said there has been some sort of backlash against soaring property taxes in virtually every state. Some lawmakers set property tax ceilings - usually for two to three years. Nevada, which in 2004 led the nation in home price appreciation, in April capped residential property tax increases at 3 percent.
Taxpayer unrest has materialized elsewhere in the form of efforts to cap state spending. Even as Colorado is considering a five-year suspension of its landmark Taxpayer Bill of Rights - voters in California are set to decide this fall whether to institute tax-and-spend limits in the Golden State.
The trend towards increasing cigarette taxes also continued during the 2005 sessions, perhaps predictably given resistance towards increasing income and sales taxes - the bread and butter of state finances.
Not even tobacco-producing states were able to avoid increasing taxes on cigarettes this year. Kentucky increased cigarette taxes from three cents a pack - lowest in the nation - to 30 cents a pack. A proposed cigarette tax increase has been a major sticking point in North Carolina's stalled budget process. Tar Heel legislative leaders on Aug. 4 agreed to increase that state's per-pack tax to 35 cents from 5 cents. In Virginia, the second year of a two-year increase in tobacco taxes took effect July 1.
"That just shows the gravity of where we are in terms of generating revenue when you have Kentucky, North Carolina and Virginia raising their cigarette taxes," CanagaRetna said.
States also sought to further expand revenue from gaming. Efforts to sanction a lottery gained ground in states like Kansas, North Carolina and Oklahoma that are among the final holdouts.
"We're pretty much down to the bone now in terms of lotteries," said CanagaRetna, adding that states also sought - with mixed success - to expand slots and Indian gaming.
The quest for revenue was coupled in statehouses this year with efforts aimed at heading off future fiscal train wrecks.
The strongest fiscal pressure facing states is the exploding cost of Medicaid, the state-federal program that serves 53 million poor and disabled Americans. NGA estimates that Medicaid now accounts for an average 22 percent of state budgets. In 2004, the program eclipsed elementary and secondary education spending as the largest single portion of state budgets.
In this year's legislative sessions, lawmakers searched for ways to keep Medicaid from bankrupting their states. In Florida, for instance, they agreed to consider Gov. Jeb Bush's (R) proposal to reform Medicaid in part by moving beneficiaries to managed-care plans.
Problems with state pension programs were another legislative headache.
Perhaps taking a cue from the Bush administration's push to privatize social security accounts, Alaska moved future state employees from a defined benefit to a 401K-style, defined contribution pension plan. Most states have defined benefit plans, which base retirement benefits on years of service and last three years of salary. Defined-benefit plans could spell huge costs for states cost as an aging workforce reaches retirement age.