Summer 2022
Forum in Review
State Budgets:
A Half-Year Check-In
State Budgets: A Half-Year Check-In
Joe CrosbyChairman and CEO
MultiStateMorgan ScarboroSenior Director, Tax Policy and Economist
MultiState
There is greater economic uncertainty now than in 2020 according to analysts Joe Crosby and Morgan Scarboro from MultiState, who explored “The Good, the Bad, and the Uncertain” economic indicators during their half-year budget review.
State Economic Indicators: The Good
Tax Policy
Most states accumulated extra funds beyond their budget needs from federal COVID support. As a result, personal income, corporate income or sales tax cuts were implemented or await final approval in nine states.
New tax strategies are also being explored, especially as data and digital information become prime commodities. A 2019 Maryland tax on digital ads was put on hold due to COVID concerns, but the tax passed in 2020 and is now in litigation. The outcome may influence other states to consider such a tax. Other attempts have focused on taxing data rather than digital ads; however, efforts have slowed.
Inflation has been a concern, and in many states relief has come in the form of gas tax holidays, one-time payments/rebates, reductions in the sales tax on groceries, and other sales tax holidays.
Spending
States increased spending by 13.6% in 2022 compared to 2021, topping $1.05 trillion and representing the highest annual growth rate since FY 1981. Spending was largely for one-time expenditures like capital construction, paying down debt, rainy day fund deposits, and pension payments. Additionally, some previously cut programs are now being restored.
Saving
Rainy day funds (RDF) are one of the most creative ways to save the surplus, the analysts noted, and the states’ RDFs are in good shape, totaling about $132.2 billion. For 45 states, the RDF is at least 5% of GF expenditures, and 28 states report RDF balances of more than 10%.
Employment
Most states have high employment rates. Nationally, about 350,000 new jobs are being added each month and unemployment rates have fallen. However, many open jobs remain unfilled. Strong employment means higher consumer spending, which increases sales tax collections and boosts employment taxes.
Property Tax Assessments
Surging real estate prices are leading to higher real estate tax assessments. While this is favorable for local government finances, constituents may balk at higher property tax bills.
State Economic Indicators: The Bad
Inflation is a major concern. Many families cannot afford inflationary prices, and even workers who take on jobs at increased wages see their additional income eaten up by inflation. Overall, inflation destroys demand; for example, high gas prices have depressed consumer demand to the point where usage is below 2021 levels by 0.5 billion barrels per week.
State Economic Indicators: The Uncertain
“Are we in a recession?” the analysts queried, looking at some uncertainty in several economic indicators.
Global Factors
Currently, there is a global mismatch between supply and demand, the analysts noted, due to China’s COVID lockdown and the war in Ukraine. While the Federal Reserve Bank has some latitude to make adjustments, U.S. government stimuli cannot overcome global issues.
Federal Aid
Federal aid to the states rose 45% during the first two years of COVID, and these funds are allocated through 2026. Economic uncertainty arises from potential changes in federal funding, particularly if midterm elections bring a change in leadership.
Labor Market Issues
The biggest disruption to economic certainty is the lack of a rebound in the labor market, even though COVID concerns have diminished. There has been a 1.5% increase in retirements among working people, now reaching 20%. However, inflation and loss of retirement portfolio value could bring early retirement workers back into the workforce. If labor market participation improves, a recession could be avoided.
If labor market participation improves, a recession could be avoided.
The Millennial generation is larger than the retiring Baby Boomer generation but there is hesitation to return to work, in part due to fear of long COVID contagion. Most critical is a mismatch of skill sets to available jobs; non-technical job openings are flat, but high-tech positions remain open for those with appropriate skills.
Demographic and Workplace Shifts
COVID-driven migration has resulted in population changes from urban to rural areas, from the west and northeast to south and inland states, impacting states’ revenues. The strength of urban economies is at risk, due to lost sales tax and income tax revenues when people move to the suburbs or work from home. 82% of US cities lost population during COVID, and workplace attendance is down 30%. Companies are downsizing their offices, so property tax revenue is down. As the COVID “state of emergency” policies expire, questions emerge about how states can tax remote workers. As localities lose businesses and population, they are losing revenue sources and will either need more money from the states or need to find new ways to raise revenue.
As localities lose businesses and population, they are losing revenue sources and will either need more money from the states or need to find new ways to raise revenue.
Equity Price Impacts
COVID-driven migration has resulted in population changes from urban to rural areas, from the west and northeast to south and inland states, impacting states’ revenues. The strength of urban economies is at risk, due to lost sales tax and income tax revenues when people move to the suburbs or work from home. 82% of US cities lost population during COVID, and workplace attendance is down 30%. Companies are downsizing their offices, so property tax revenue is down. As the COVID “state of emergency” policies expire, questions emerge about how states can tax remote workers. As localities lose businesses and population, they are losing revenue sources and will either need more money from the states or need to find new ways to raise revenue.
State Economic Indicators: The (Mostly) Good
Bureau of Labor Statistics, Seasonally Adjusted Unemployment Rate by State, May 2022.
State Economic Indicators: The Bad
Data: Bureau of Labor Statistics.
State Economic Indicators: The Bad
Data: Bureau of Labor Statistics.
Discussion
Moderated by
Tom Finneran
Joe Durso
Pernod Ricard USA
What are the likely economic impacts as federal payments to the states and unemployment payments to individuals dry up?
Mr. Crosby
Chairman and CEO, MultiState
The data are inconclusive; however, the states that opened up after COVID more quickly also recovered more quickly and have exceeded pre-pandemic employment levels.
The economic impacts of global issues, such as supply chain disruptions or China’s Zero COVID policy, are driving higher costs for components and, therefore, higher prices for finished goods. One response has been “near shoring,” or accessing materials from closer by or from new sources, and keeping larger inventory on hand.
Sen. David Sokola
Senate President Pro Tempore, Delaware
Retirements have been higher among those who were forced to work in the face of COVID risk, such as medical professionals, where burnout and work overload were problems. With 401K portfolio values dropping, some people will return to work, but they may be more demanding about where and how they work in order to avoid COVID exposure.
Sen. Larry Taylor
Chair, Senate Education Committee, Texas
Full employment is considered 4%, but the formal employment numbers only capture those people actively looking for work. Our state currently has only 2% unemployment among those who want to be employed. We have up to 800,000 jobs open and unfilled. Texas has seen a big influx of people but many may lack the necessary skills for those open jobs.
Mr. Crosby: Most sectors have recovered to pre-pandemic levels; however, the hospitality industry is still working its way back from the devastation of 2020’s pandemic-driven shutdowns. In May, hotels hit average daily occupancy rates of 59.3%, their highest since February 2020, right before the pandemic hit.
Preston Baldwin
Centerpoint 360
What has been the impact of the flex economy, with 60 million gig workers and stronger demands among millennials for employment flexibility?
Ms. Scarboro
Director, Tax Policy and Economist, MultiState
Worker preferences are being expressed, more options are being demanded, and there is a battle for talented employees. As a result, worker preferences are having a big impact on employers. In fact, according to survey data, 43% of people, if forced to return to an office, would quit. As the economy normalizes, there may be less flexibility among employers and fewer worker demands.
Emerging Problems for Localities
Ms. Scarboro: What problems do you see emerging for localities in the next few years that may impact your state senates’ agendas?
Sen. Matthew Huffman
President of the Senate, Ohio
Localities are not yet coming to the state to ask for funding because everyone is flush with funds from federal COVID funding. Our 600 school districts have received a lot of federal funding and our 400 local jurisdictions have the power to tax.
Sen. Chuck Winder
Senate President Pro Tempore, Idaho
Idaho cut tax rates and provided rebates for two years in a row. However, we have an influx of people who like to launch initiatives. One is “Reclaim Idaho,” which seeks to impose a 6% to 8% increase on corporate income tax, to be used for education, in spite of the fact that 64% of the current state budget is allocated to education.
Sen. David Gowan
Chair, Senate Appropriations Committee, Arizona
We focused on equalization tax relief, passing the largest tax decrease in history. We now have a 2.5% flat income tax. The state is the fastest growing in the U.S. and even our urban populations are increasing, so most of our excess funds are allocated to one-time investments. We had a slim budget during COVID times, so now there is some catch-up. Our state employees got their first salary raise in 10 years; additional funding is allocated to education, which represents 50% of the state budget, and we implemented a voucher program that allows $7,000 for every child to be used for any school. We replaced $330 million in property taxes with our excess funds, and increased business property taxes from 15-18%. But we are keeping an eye on spending, determined not to overspend.
Sen. Robert Stivers
President of the Senate, Kentucky
We have kept the sales tax at 6% and our Rainy Day Fund at 10%, and we set triggers to reduce taxes. For example, revenue was $900 million more than our January projection, which triggered a 0.5% decrease in personal income tax for the next 3 years. By 2030, we anticipate being a no-income-tax state. However, we are concerned about energy costs. We haven’t yet seen the impact of high energy costs on food production; for example, it costs $90 per acre to run a combine; the price of fertilizer has doubled, and the cost of insecticides has quadrupled. These food production costs could drive the price of bread up to $6 a loaf.
Sen. Jonathan Dismang
Chair, Senate Joint Budget Committee, Arkansas
The legislature had anticipated reducing income tax rates in 2026 and 2027, but have decided to reduce the taxes now, with the corporate income tax rate at 5.3% and personal income tax at 4.9%. We did not implement gas tax or sales tax holidays, because it is not certain that those savings will be passed on to consumers.
Sen. Mimi Stewart
Senate President Pro Tempore, New Mexico
We have cut taxes on gross receipts from both sales and services and, even though our property tax is among the lowest in the nation, we cut the property tax by one eighth of a percent this year and one eighth next year, representing about $100 million. Beginning with tax year 2022, most people are exempt from paying taxes on their Social Security benefits and and on military pensions. Tax relief from the new Social Security exemption is expected to total $84.1 million in the first year. We increased the child credit, created a refundable solar tax credit and increased state employee salaries, which include teachers, and salaries for nurses. About 45% of our budget is derived from oil revenue and specific cuts have been made in the energy sector.
Sen. Bill Ferguson
President of the Senate, Maryland
We implemented a 30-day gas tax holiday and are facing a lot of pressure to extend it, but we will not do so. We found that only 57% of the reduction reached consumers. It is more about optics, not a real savings for consumers.
Sen. Paul Newton
Chair, Senate Finance Committee, North Carolina
We’ve been cutting taxes in a responsible way for the past decade. When companies are making long-term capital investment decisions that will create new jobs for your state, they need to have certainty and stability in the tax code, so we avoid tax volatility. We also eliminated three out of four franchise taxes. These changes are designed to make the state even more attractive for business investment. The state also reduced the personal income tax from 8% to 3.99%.
Remote Work and the Gig Economy
Tom Finneran (Moderator) asked how companies in the private sector faring with hybrid/remote employees and return-to-work policies. He noted that when people are forced back to an office after months of working from home, they may demand gas support, childcare, parking reimbursement, etc.
Sen. Robert Stivers: Surveys show a 14% increase in productivity when people work from home, so why bring them back?
Tom Foulkes
BSA/The Software Alliance
The demand for people to fill software jobs is growing and competition for good employees is fierce. As a result, top talent is allowed to work remotely.
Vans Stevenson
Motion Picture Association
The film industry shut down only from March to June, and went back to work quickly to keep production on schedule; however, our corporate office in Los Angeles closed and the Washington, DC, office is open three days per week.
Stefani Millie Grant
Unilever
As a food manufacturer, we have to keep people working on-site and are struggling with employee retention. On the corporate side, employees can work from home and go to the office three days a week. The company is using incentives such as free lunches and parking to encourage on-site workers.
Brian Wise
Yum! Brands, Inc.
Reliable childcare is a challenge and seems to be the biggest issue for returning workers. If they or their children are exposed to COVID, they have to be out for two weeks.
Toney Anaya
DoorDash, Inc.
In 2021, DoorDash’s six million independent contractors earned $11 billion. Many of them were part-time, supplementing other sources of income. For the 10,000 full-time employees, it is mostly optional to work remotely or come to the office, and 10–15% only come into the office for in-person meetings. However, we found that it was important to schedule off-site meetings to bring people together physically, to get to know one another.
Sen. Matthew Huffman: The option to work remotely is affected by the kind of work you do. We have two hospitals in our small town and those workers have to be on-site. Attorneys, on the other hand, want to and can work remotely.
Mr. Crosby asked the senators if they had concerns about their budgets deteriorating in FY2024. Nearly all senators indicated that they felt comfortable with their fund balances and were not worried.
Sen. Jonathan Dismang: It’s been easy for the last 10 years to grow the budget by 3% a year; however, with inflation at 8%, we have to figure out how to grow the budget just to compensate for inflation.
Presenter Biographies
Joseph R. Crosby
Chairman and CEO
MultiState
Joe Crosby is the Chairman and CEO of MultiState, a state and local government relations company. He is involved in all aspects of the firm’s efforts to help clients resolve the challenges they face in the state and local government arena, with a concentration on providing strategic counsel, identifying and deploying political assets, and advancing tax policy objectives.
Morgan Scarboro
Senior Director, Tax Policy and Economist
MultiState
Morgan Scarboro joined MultiState in 2018 and currently serves as Manager, Tax Policy and Economist. She uses her expertise in state tax policy to advise clients on policy trends, manage state advocacy coalitions, and track corporate income tax legislation across the country. She is a frequent panelist for state tax policy events and updates. Morgan also serves as co-chair of the Women in Government Relations' State Relations Task Force.
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