State Budgets: Roundtable

​​Corina MulderConsultant

​Winter 2023 Forum in Review​Introduction​Plato’s Allegory of the Cave​How to Leverage Social Media​AI for the Public Sector​State of the State Budgets​Budget Roundtable​Nationalism Revived

A deep dive into state budget issues was led by fiscal expert Corina Mulder. She reported on the current state of state budgets and asked participating leaders to elaborate on recent quotes from news sources.

Arkansas

Ms. Mulder noted that Arkansas’ FY 23 projected General Fund (GF) revenue is $6.9 billion and expenditures are set to be $6.0 billion. The state’s Rainy Day Fund (RDF) is well-funded at 20.1% or $1.3 billion. She observed that when state coffers are flush, governors often want to cut taxes, and queried what the Arkansas legislature planned.

Sen. Jonathan Dismang (AR): Acknowledging that the state has a strong surplus, the legislature has focused on saving: In addition to the fully funded RDF, a Catastrophic Reserve Fund was created with $1.3 billion set aside for priority spending if state revenue decline and an additional $150 million is being held in reserve. Spending plans include $500 million investments in construction of prisons and $500 million for school construction. The potential to cut income taxes will be on the agenda. “When the recession happens, we want to be an in-bound state in order to maintain our revenue,” said Sen. Dismang. “Our tax policies are designed to encourage business and retirees to come to Arkansas.”

Ohio

Ohio’s projected GF revenue for FY 23 is $28.3 billion and projected spending is $27.8 billion with the RDF at 9.8%, Ms. Mulder reported. Noting that, since 2005, Ohio lawmakers have steadily reduced the state’s income-tax rates, she queried Sen. Matthew Huffman about next steps.

Sen. Matthew Huffman (OH): The state’s income tax rate has been dropping since 2005, and our goal is to minimize it. It’s not right that the harder you work, the more you pay. In the 1990s, we had 9 brackets with a 9.5% maximum tax; by 2022, we had 3 rates, with no income tax on incomes less than $25,000 and on small businesses with less than $250,000 in income. The highest tax rate is now 3.99%. However, additional taxes are imposed on the local level. With 608 school districts, there are many pieces to the tax puzzle.  Our spending priorities will focus on K-12 education and on funding Medicaid.

Oklahoma

Tax reform is on the agenda for Oklahoma, Ms. Mulder said, but with FY 23 GF revenue projected at $8.4 billion and spending at $8.5 billion, there may be challenges, despite the state’s 17.2% RDF.

Sen. Greg Treat (OK): Our goal is to get to 0% personal income tax but that doesn’t seem feasible; furthermore, the state has restrictive measures on changing the tax rate and requires a three-quarters vote to change it. A Tax Reform Group is due to present proposals to the legislature, and we will see what they suggest. We currently have a 4.75% personal income tax and are looking at lowering that as possible.

Indiana

Ms. Mulder quoted Sen. Rodric Bray (IN) who noted that a forecast of $600 million new dollars per year in revenue sounds like a lot of money, but “in the scheme of about a $38 to $40 billion budget, it really isn’t. Those dollars aren’t going to go really far.” The state’s FY 23 GF revenue forecast is at $19.1 billion, with expenditures projected to be $19.0 billion; and RDF at 6.9%.

Sen. Rodric Bray (IN): In 2022, we reduced the personal income tax from 3.4% to 3.25% and this year it is proposed to drop to 2.9%. We’d like to become a no-income tax state. However, our General Fund budget is set to grow 2% and our Pension Fund must be fully funded, and, in the event of a recession, we would not be able to enact tax cuts. We would have to assess the situation.

Our spending priorities include investing in mental health to build infrastructure and deliver public health services, and investing in K-12 educational initiatives. Our state’s hospital costs are outliers — much higher than nearby states —and this is unacceptable. We are demanding greater transparency on hospital costs to make them more competitive.

Utah

Ms. Mulder reported that FY 23 GF revenues are projected at $9.7 billion and expenditures at $11.6 billion, and the RDF is at 8.9%. Utah’s governor proposed $1 billion in tax relief. She asked Sen. Ann Millner how the legislature expects to respond to this.

Sen. Ann Millner (UT): The Governor proposes ideas, but the legislature has full control over the budget. We do expect some reduction from our current 4.85% income tax rate — all of which is earmarked for education and disabilities funding. Our fastest growing revenue source is our income tax. We need more flexibility in the budget but we have to weigh several factors:

1. How to ensure that any tax relief will go to the people

2. How to prepare for a possible recession, which requires cautious revenue estimates and keeping money in reserve

3. How to make generational investments in higher education and transportation and critical investments in water infrastructure.

South Dakota

South Dakota’s governor joined the chorus of voices looking to relieve inflationary stresses, proposing a reduction of taxes on groceries, Ms. Mulder noted.  According to projections, the state GF revenue for FY 23 will equal its expenditure at $2.1 billion, and the RDF is at 20.5%. Ms. Mulder asked if the governor’s proposal will succeed.

Sen. Lee Schoenbeck (SD): We are not going to cut the sales tax. A potential recession could take a toll on state revenues in the coming year, and inflation has already left budget holes to fill. Our revenue is up 12%, and $700 million of the excess revenue will be allocated to building prisons. Additionally, the state has large reserve funds that we could collateralize.

Hawaii

In the Aloha State, the Governor proposed a tax rate reduction on groceries and medicine.

Despite FY 23 GF revenues being pegged at $10.6 billion and expenditures at $11.0 billion, the state still has a surplus.

Sen. Ron Kouchi (HI): Our focus is to reduce the burden on those most in need. To this end, the state will give back $330 million to residents, allocating $300 rebates to families earning less than $100,000 per year and $100 rebates to those over this mark. The state also has a refundable earned income credit. But a lot of the surplus is from federal handouts and not a recurring, reliable revenue stream. Therefore, permanent tax cuts could be a problem. Additionally, because Hawaii is the nation’s largest service economy, it depends on tourists, and 30% of the excise tax revenues comes from visitors. We would not want to lose this.

Several issues are front of mind for the Hawaii Legislature:

1. The state faces severe housing shortages and homelessness, especially among its native people. The Hawaii Homelands Act allocates $600 million to enable 20,000 native beneficiaries to get affordable housing.

2. K-12 learning losses due to COVID shutdowns pose ongoing challenges, especially as Hawaii has only one school district; therefore, any Maintenance of Effort (MOE) requirements impact the whole state system. If this requirement lapses, we will have more flexible use of federal funds.

Rhode Island

The state enjoyed a significant surplus in 2022; however, FY 23 projections show GF expenditures at $5.0 billion and revenues at $4.9 billion with the RDF at 4.9%. Ms. Mulder asked if the current surplus is sufficient for the future.

Sen. Dominic Ruggiero (RI): The report of a significant surplus for the current budget year is welcome, but year-to-date growth is modest, inflation is a major concern, and economic advisors caution that a recession remains likely. The legislature is looking to provide some inflation relief, so we are making a $300 million investment in affordable housing, reducing taxes on military pensions, and eliminating taxes on the first $20,000 of pensions. Municipalities formerly charged a tax on cars, and this has been eliminated. We don’t anticipate any tax increases and will not enact a “millionaire tax,” hoping that Massachusetts millionaires will move to Rhode Island. Our spending priorities include mental health services for children and teachers and education investments.

Sen. Hanna Gallo (RI): We have funded full-day kindergarten and now are exploring the possibility of funding universal pre-school. The data clearly demonstrate that giving students help at the beginning of their education is the most effective way to improve their outcomes.

Louisiana

The outlook for Louisiana includes a forecast of $1.5 billion excess to spend in FY 23. Ms. Mulder asked how the Legislature will make use of the surplus.

Sen. Page Cortez (LA): The economy is doing better than anyone would have predicted. But, looking back, there have been ups and downs. Despite the devastation wrought by Hurricane Katrina in 2005, the influx of insurance money and sales tax from home repair spending created a boom era. In response to this boom, in 2008 we cut the income tax, but this meant revenues were down by $600 – 800 million per year. In 2021, a statutory requirement was enacted that triggers tax rate reductions for the individual income tax and the corporate franchise tax when revenue thresholds are met. Therefore, it is prudent for the Legislature to take the lowest estimate of revenue. Currently the Legislature is focusing allocations to:

1. Pay all debts

2. Increase RDF funding. The Revenue Stabilization Fund is funded at $1 billion.

3. Fix roads and infrastructure

Delaware

The state estimates $5.8 billion in GF revenue and $5.8 billion expenditures in 2023, with the RDF at 5.5%. Recent forecasts anticipate a bump in revenue for 2024, according to Ms. Mulder, who asked what priorities the Legislature is considering.

Sen. David Sokola (DE): In a state with one million people, we have 1.4 million businesses incorporated. Fully one-third of revenue is from corporate taxes. We have no sales tax. Corporate taxes are volatile and this makes us view projections guardedly. There also are no county roads, schools, or prisons — they all are managed at the state level. Therefore, the Legislature takes a cautious view of the anticipated “bump” in funding and see continued projections for a recession. Our goal is to make fair, appropriate and sustainable allocations. The key areas are:

1. Funding our RDF

2. Creating a Budget Stabilization Fund

3. Setting benchmarks to limit growth in the state budget

A significant turnover in the Legislature has brought some new priorities to the forefront, with pre-kindergarten education a focus for a $300 million investment. We need new infrastructure and also to attract talent to meet these needs.

North Carolina

North Carolina’s revenues keep exceeding projections, with FY 23 GF revenues projected to be $30.5 billion and expenditures $27.9 billion, and the RDF at 17%. State economists said that revenues are $1.2 billion above the target through the first five months of the fiscal year. Ms. Mulder asked how the Legislature is responding to this growth.

Sen. Paul Newton (NC): Thanks to continued growth, we are setting big goals. One goal is to get to 0% personal income tax. There is nothing more stimulating to the North Carolina economy than people keeping and spending their money in state.

We also are looking to attract people and businesses to move to the state, and are currently third behind Florida and Texas for in-flow migration. Our business tax laws are designed to incentivize businesses, and we want people to come and place a life bet on North Carolina. To achieve this, the Legislature is focused on:

1. Affordable housing

2. Job training and education, including better teacher salaries

3. Diversification of the tax base

Alabama

The state’s outlook for FY 23 includes $10.9 billion in GF revenue and $11.1 billion in expenditures while maintaining the RDF at 14.1%, Ms. Mulder reported. What are the Legislature’s priorities for the 2023 session?

Sen. Greg Reed (AL): Economic development and job creation are at the top of the list. We have had 5 years of success with job creation initiatives and, in order to compete with neighboring states, those incentives need to be reauthorized and expanded. Additionally, in 2022, we had a $160 million tax cut, including corporate taxes. Such economic development incentives are important to keep bringing businesses into our state.

Presenter Biography

Corina Mulder

Consultant

Corina developed expertise on state legislatures during her tenure at the National Conference of State Legislatures (NCSL), where she planned trainings for legislative leaders, was director of State Services, and led the Fiscal Affairs Program. Corina has written extensively on state budget issues and been quoted in The Wall Street Journal, The New York Times, and other prestigious publications. She holds a Master’s Degree in Public Administration from the University of Colorado and a B.A. from CU-Boulder.

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