JANUARY 11–14, 2018

The State of the State Budgets

Corina Eckl

Director
Leaders' Services
National Conference of State Legislatures

After several challenging fiscal years, Ms. Eckl’s 2018 report was more optimistic. She reported that State finances largely are stable with revenues and State spending mostly on target with projections. However, the outlook is mixed due to slow and modest growth and uncertainty about Federal tax reform, which complicates State fiscal decisions.

Revenue vs Expenditures

The average growth in 2018 State general fund revenues is projected to increase 3.9% with expenditures increasing by 3.3%, compared with last year’s increases of 3.4% in spending versus 1.9% increase in revenues. On average, State general fund revenues are made up of personal income taxes (about 36%), sales and use taxes (32%), and corporate taxes (5.7%).  Ms. Eckl reported that 41% of States expect to meet or exceed projection targets, while only 4% predict shortfalls. However, Ms. Eckl pointed out that revenues have frequently fallen short of projections, and the large reserves reported by Texas and Alaska drive the overall balance up. Without them, the forecast is much lower.

Eternal Expansion?

The current economic expansion has lasted 102 months, second only to the 120-month expansion in 1991, and exceeding the post-World War II average of 58.4 months. While some economists believe that the expansion could continue for 2 years longer, others say a shock to the system such as a stock market failure or a change in oil prices could precipitate the end of expansion. Others contend that people’s spending behaviors change over the course of a long expansion, and this could lead to a gradual tapering off of the expansion.

Federal Tax Reform

Expanding the tax base is the major thrust of current tax reform, Ms. Eckl said and, according to the Tax Foundation, most states will see revenue increases if they conform to federal tax definitions for personal and corporate income taxes, as most do. Conforming simplifies compliance for filers and reduces administrative burden for the States. However, Ms. Eckl noted that States are just beginning to explore the impact on their revenues, and this could offer opportunities for States to implement their own tax reforms.

State-by-State Discussion

A hallmark of Ms. Eckl’s annual presentation is a deep dive into each of the State’s current fiscal situation. Framed by quotes from State leaders, she asks Forum participants to comment on the conditions in their respective States.

 

Idaho

“Every time you have a change that you’re conforming to in the federal law, it’s somewhat of a guess how much effect that’s going to have on your state revenues. And when you’re guessing, you don’t have to be off very far to find yourself with a shortfall…”— Brent HillSenate PresidentThe Hill, Jan. 9, 2018

Sen. Brent Hill (ID) commented that it is “a shot in the dark” to predict the impact of tax reform. Idaho will conform to the new tax reforms, he said, but may create a Child Tax Credit to balance against the exemption loss. However, he noted that Idaho has the fastest growing population among the States.

“People are moving here from more regulated States. And the State invests in workforce development, for example, increasing public education funding by 23% over the past 3 years. Idaho also has low taxes and low energy costs, a diversified economy, and is first in construction jobs,” he noted. As a result, personal income and sales taxes, which make up about three-fourths of Idaho’s general revenues, also are increasing, and the State expects to exceed its revenue projections.

Utah

“These consensus figures are encouraging and good news for our economy, but we must continue to be conservative when examining the entire budget to ensure we find the correct fiscal balance.”— Wayne NiederhauserSenate PresidentKSL, Dec. 13, 2017

Utah is the third fastest growing State, with an anticipated $500 million of extra revenue in the 2018 budget. Sen. Wayne Niederhauser (UT) remarked that growth also poses challenges, especially in the need for expanded infrastructure, which is expensive to build. He observed that the State’s universities are attracting engineering, biomedical, cancer research, and high-technology industries to the State. Revenue increases are critical to provide funding for needed infrastructure. “The challenge is to be disciplined and not spend every extra dime we’ve got. We are supporting that fiscal discipline by examining trends over time. We are committing growth revenue to one-time investments rather than starting up programs that would have to be terminated in a downturn,” Sen. Niederhauser said.

Arkansas

“The past year has been eventful for State government, and the development that may have the most positive long-term impact for the Arkansas economy was passage by the legislature of a $50 million a year tax cut for low-income families.”— State Capitol Week
in Review
Jan. 1, 2018

Tax reform in Arkansas parallels the federal direction, seeking to broaden the tax base while lowering taxes overall, Sen. Jonathan Dismang (AR) reported. The State currently has a complex patchwork of tax cuts and exemptions. A Task Force has been convened to review the Tax Code.

According to Sen. Dismang, the State’s economy is good, but Medicaid expansion continues to pose challenges. Arkansas had projected $100 million in Medicaid savings, but this evaporated due to Federal Medical Assistance Percentage (FMAP) cuts. Despite this, the outlook is good, Sen. Dismang said. For example, December sales taxes netted $10 million over forecast, suggesting that box stores are overcoming online competitors with better pricing and shipping policies.

Michigan

“We believe that the outlook remains favorable for Michigan to continue its comeback story. If our forecast proves correct, Michigan’s economic recovery will extend to over 10 years—among the longest continuous stretches of job growth in the state since the Great Depression.”— University of MichiganMiBiz, Jan. 3, 2018

Michigan’s revenues fell to 1960’s levels after the 2008 downturn. In 2011-2012, the State experienced stabilization rather than recovery. The State is still losing population and is second in the US for foreclosures. However, the outlook is optimistic. The State is currently at 1968 revenue levels and is expected to meet its 2018 forecast thanks to higher sales tax revenues that will compensate for below-estimate personal income taxes. Based on conservative projections, the 2017-2018 budget is likely to produce a surplus, Sen. O’Brien said.

Infrastructure improvements are key challenges facing Michigan, and the legislature committed infrastructure investments to be phased in over 2018-2019. Sen. O’Brien pointed out that State and Federal road-building funds dictate specifications that may not be appropriate for all neighborhoods. She advocated for State and local alliances to define how funds for infrastructure should be spent.

Indiana

“This session, we will continue to fight the opioid epidemic, look for ways to improve our work-force development efforts and support our schools. We will also be working to improve civil forfeiture laws and will work to allow the carryout sale of alcohol on Sundays. There is a lot of work to be done in the coming months on all of these issues, but our caucus is ready to take on those challenges. We look forward to the session ahead."— David LongSenate PresidentMyWabashValley, Jan. 8, 2018

While Indiana’s personal income taxes and sales taxes are on target, corporate taxes may fall $400 million short of projections. Sen. David Long (IN) explained that the State is in good fiscal shape and, therefore, has been able to cut corporate taxes repeatedly. They currently have the lowest unemployment rate in the Midwest, are at full employment, and are actively seeking more workers to fill jobs. The State’s infrastructure is in good shape, he said, and a new gas tax will fully fund a $1.2 billion transportation plan to keep infrastructure up-to-date with demands. Indiana anticipates that Federal tax reforms will be a net win for the State, with more revenue coming into the general fund.

The biggest challenge for Indiana is the opioid crisis, Sen. Long said. “We need triple the former number of foster parents to provide care for children whose parents have been lost to opioids. It is hard to keep case workers, where first-year turnover rates are at 47%. The costs of this epidemic keep escalating,” he reported.

Ohio

“We tackled a very challenging budget cycle, one where we faced a gap of about $1.1 billion, where frankly the existence of the gap wasn’t widely acknowledged until the middle of April. We had very little time to make a lot of tough decisions. If you look at where we were at this point a year ago and where we are now with the prior budget and this one, we are right on track with the revenues coming in every month.”— Larry ObhofSenate PresidentToledo Blade, Dec. 29, 2017

Ohio has seen a slow but steady improvement in the fiscal outlook, and Sen. Bob Peterson (OH) says he anticipates that the State will meet its 2018 forecasts. He pointed out that Ohio has lowered taxes and, as a result, has created many jobs. Unfortunately, Ohio lacks workers with the requisite skills. Now, the focus is on workforce development to trained qualified workers for those jobs. The legislature also allocates a capitol budget every 2 years. For the past 6 years, funds have flowed back to the districts, but prioritizing projects for these funds is a challenge, Sen. Peterson said.

Louisiana

According to a Dec. 14 article in The Advocate, Louisiana’s income projections have improved, but state officials were muted in their excitement because a nearly $1 billion budget gap still looms next year. “It’s not time to go out and break the champagne bottle.”— John AlarioSenate PresidentThe Times-Picayune,
Sept. 21, 2017

A couple of years ago, Louisiana had a $2 billion budget gap, Sen. John Alario (LA) reminded the Forum. “We solved that through program cuts, streamlining services, and approving a 1 cent sales tax increase (from 4% to 5%), which is about to expire. The loss of that 1 cent tax increase is contributing to the $1 billion gap,” he said. The State has the highest sales tax in the US. Still, a step toward addressing the budget gap may be to reduce the sales tax by half a cent, rather than sacrificing the whole 1 cent, Sen. Alario said.

The State also is adjusting its sales tax brackets, and exemptions have been cut by 28%. The Federal reforms also will help by allowing fewer itemized deductions. The Governor is presenting a budget with $1 billion in cuts in higher education and health care.  Such difficult cuts may make people more accepting of a sales tax, Sen. Alario concluded.

Sen. Danny Martiny (LA) echoed Sen. Alario’s remarks. He noted that a special session would be required to address the budget issues in 2018, when the budget is not on the legislative agenda. The Democratic Governor is asking for tax reform but refuses to call a special session without a consensus. Meanwhile, politics have plagued the budget process. Republican legislators refuse to cooperate in a consensus discussion, forcing the Governor to take the blame for an Executive Budget that is $1 billion short, Sen. Martiny said.

Delaware

“In recent years, state tax revenues have fallen short of expectations, forcing midyear cuts and one-time solutions to balance the budget. State tax revenues aren’t keeping up with the state’s economy.”— State House News ServiceJan. 3, 2018

“The Delaware legislature listened to business needs and introduced bills to help our businesses stay competitive,” Sen. Nicole Poore (DE) reported. The bills gave companies better incentives to stay in the State, companies such as Nemours and Dupont, which contributes $8 billion in revenue, thus preserving jobs and corporate taxes.

Last year saw a $400 million deficit in the budget, but 2018 projections show a $30 million increase in revenue. “It required a Special Session to come to an agreement about the 2018 budget,” Sen. Poore said, “Bipartisan negotiation—a good kind of fighting—allowed us to come to agreement.”

The biggest challenge facing Delaware is the opioid crisis, Sen. Poore noted. “There is not enough funding to address the problem. We need to have programs, support services, and follow-up after detoxification to keep people off drugs. They have to fight that fight every day. When they become stable they are taxpayers, part of the society, and not a drain on it,” she concluded.

Massachusetts

Referring to budget sustainability:“I think having bipartisanship will help us make sure we're making the right decisions in the state of Delaware. Ultimately we want to focus on the economy, what works best for the people and have a level playing field."— Nicole PooreSenate Majority WhipWDEL, Jan. 8, 2017

Massachusetts expects to meet its 2018 forecast projections, according to Sen. Mark Pacheco (MA). The economy is improving with substantial construction underway in the cities, creating many new jobs, and reducing unemployment to 3.7%. Revenues in 2017 were $730 million ahead of projections through the end of December. However, tax reform is causing legislators to be cautious about an apparent surplus. “People may be making prepayments on their 2018 taxes, and the surplus may be illusory. What will happen next year?” Sen. Pacheco queried.

Medicaid, which consumes $10-11 billion of the state budget, continues to be the biggest challenge in Massachusetts, Sen. Pacheco noted. While the Federal government seeks to reduce the deficit through tax reform, Federal proposals to cut Medicaid by 30% would have a $3 billion impact on Massachusetts. It is uncertain what the next Federal changes in healthcare and Medicaid will be and how they will affect the States, Sen. Pacheco observed.

Massachusetts is a ballot-measure State with two taxes on the ballot. The popular “Millionaire Tax” would impose a 4% surcharge on income over $1 million and allocates the revenue to education and transportation. However, on the loss side, there is a ballot issue to decrease the sales tax, which would force program cuts.

Previously, a citizen ballot led to repeal of the gas tax, which has put infrastructure improvements at risk. “The State needs new revenue to invest in transportation, commuter rail, and improvements that affect the regional economy of all of New England. Fortunately, the legislature and the Governor have a cooperative relationship and these issues will be addressed,” Sen. Pacheco concluded.

Illinois

“For the past several weeks, Senate Republican Leader Radogno and I have been talking about how to solve the problems of our State. It’s been a very frank discussion, and we have a lot of realities to face. I think we in the Senate recognize the problems, and that we are potentially close to an agreement on how to solve them, but we’re not quite there.”— John CullertonSenate PresidentVoices in the News, Dec. 29, 2017

Last year, Illinois’ personal income and sales taxes came in below estimates, and 2018 forecasts have been adjusted downward, Sen. John Cullerton (IL) reported. For several years, Illinois has operated without a passed budget and has overspent by $7 billion per year, creating a $16 billion deficit. In a determined bipartisan effort to reach agreement, legislators produced a budget that required significant reforms and reinstated a 4.9% flat personal income tax (excluding retirement income).  The Republican Governor vetoed the budget but was overridden by Republicans in the House. Currently, a contentious gubernatorial race is underway and the legislature’s goal is simply to pass a budget and undertake no major initiatives until after the election, Sen. Cullerton said.

Minnesota

“A deficit of $188 million is projected for the FY 2018-19 biennium. The forecast doesn’t factor in nearly $120 million in operating funding for the Minnesota House and Senate, which the governor vetoed last spring.”—The Associated PressDec. 6, 2017

Minnesota Governor’s line item veto of $120 million in funding for the legislature at the very end of the session led to a Supreme Court challenge, reported Sen. Michelle Fischbach (MN). The Supreme Court ruled that the Governor did have the authority for the veto and sent the parties to mediation, which failed. The House and Senate dipped into their “carry forward” Legislative Coordinating Commission funds to keep functioning.

Now the legislature is back at full staff and has a Gentlemen’s Agreement with the Governor to pass a legislative budget, which the Governor agrees to sign. This struggle is indicative of the contentious relations between the Governor and the legislature. The party split is 33 Democratic to 34 Republican in the legislature. With Sen. Al Franken’s departure from the US Senate, the lieutenant governor moved to the US Senate, leaving her position vacant. Sen Fischbach (a Republican) was tapped for lieutenant governor but was also able to retain her Senate position, she reported.

Commenting on the budget, Sen. David Senjem (MN) noted that in 2008, Minnesota faced a $6.2 billion deficit, so the current budget deficit of $188 million is manageable, especially as the State has $2 billion in its Rainy Day Fund. He anticipates an additional $800 million in revenue from Federal tax reform. Minnesota’s infrastructure is crumbling, Sen. Senjem observed, and it will require hundreds of millions of dollars to fix it, he concluded.

North Dakota

“Many top lawmakers have been critical of how revenue forecasts have been crafted and explored options of doing their own. But earlier this year, Gov. Doug Burgum vetoed a section of a bill that would create a legislative panel allowing lawmakers to pursue the idea. The Legislature instead created an interim committee that was out of the governor’s reach.”— The Associated PressDec. 5, 2017

North Dakota does not have a legislative session this year, but Sen. Rich Wardner (ND) noted that the forecast is on target. He also reported that the legislature had sued the Governor, a newcomer to politics, not over any significant issues, but as a way to clarify the roles of the Governor and the legislature.

Rhode Island

“Rhode Island state officials say they will have to keep a close eye on spending and hiring in order to close a daunting budget gap, but worry the governor’s administration is showing a lack of urgency.”— The Associated PressDec. 6, 2017

Sen. Frank Lombardo (RI) reported that, despite a current $60 million deficit, the Governor’s budget proposed a $500 million infrastructure investment. Meanwhile, the amount that Rhode Islanders pay in car tax over the next fiscal year was reduced by about $26 million, which the state will reimburse to cities and towns. The Senate also approved a bill requiring the state to file reports, beginning in 2021, on the sustainability of eliminating the car tax, a strategy that failed in prior years when recessions hit. Sen. Lombardo summed up the current fiscal situation saying, “We need to put the brakes on borrowing.”

Montana

“Montana’s revenue forecast is murky at this point as experts try to predict how taxpayers will respond to the new law and how that law meshes with Montana State tax laws. A revenue committee meeting is scheduled for March and state officials expect to have a clearer picture by then.”— Newstalk KGVO.comJan. 9, 2018

Montana’s revenue forecasts are “all over the map and change every day,” according to Sen. Scott Sales (MT), citing a range of estimated shortfalls from $250 million to $46 million. What is clear is that the State is unlikely to meet its forecast. In Montana, where the Governor is a Democrat and the legislature is Republican, the legislature is happy to let the Governor make the necessary cuts to address the shortfall, and take the political fall-out. Sen. Sales concluded saying, “I love when we’re out of money. It forces us to examine what we have been doing with our budget.”

Wyoming

“Diversifying Wyoming’s economy for the long term is no easy task, but it is the most pressing challenge we face. Moving forward, we must balance the realities of our state’s fiscal situation with strategic investments. I remain cautiously optimistic that we can do just that during the upcoming legislative session. After all, if not now, when?”— Eli BeboutSenate PresidentCounty 10, Jan. 3, 2018

The biggest concern for Wyoming is diversifying the economy. Currently, 70% of Wyoming’s $3 billion general fund revenue is derived from minerals. The slump in oil, natural gas and coal prices meant the State lost half of its budget, reported Sen. Eli Bebout (WY). Now legislators are trying to balance the budget and be prudent with their savings. The State has a constitutional requirement to maintain certain funds, restricting use to the interest generated. For example, the State’s Legislative Stabilization Reserve Account or rainy day fund, holds $1.5 billion. “It could be a temptation to use that money,” Sen. Bebout said, “but we are fiscally conservative and are looking to reduce government.” The biggest challenge is funding for K-12 education, the Senator said. However, he added, out of adversity comes opportunity. With tax reform, we can broaden our tax base and diversify our economy.

Oregon

“Lawmakers passed the biggest state infrastructure funding plan in a generation this year by passing a $5.3 billion package of new taxes and fees. The bill ended up passing with generous bipartisan support.”— The Oregonian/Oregon.LiveDec. 30, 2017

Sen. Ginny Burdick (OR) reflected that the State’s economy is performing well and will likely exceed expectations. However, Medicaid funding is a key challenge. The legislature proposed a bipartisan bill to fund Medicaid expansion, but the issue became a ballot initiative. If funding for expansion is defeated, 350,000 people will lose Medicaid coverage, the Senator reported.

Texas

“[Texas] Senators voiced hope that actions by the Trump administration would ease some strains on the budget, including the $800 million they plan to spend on border security over the next two years, and allow them to put more funding into other areas such as education.” “Senate leaders warned Tuesday that Hurricane Harvey could put a billion-dollar hole in the Texas budget, an ever-growing amount that could affect how much money is available for other state programs.”— The Houston ChronicleDec. 6, 2017

Hurricane Harvey has had a $1 billion impact on funding for education, Sen. Larry Taylor (TX) pointed out. Education accounts for half of the State’s budget, and these funds had to be reallocated to provide services for homeless people displaced by the storm. Additional funds are desperately needed to rebuild infrastructure. “The storm has forced us to consider strategies for hurricane mitigation, such as building a coastal barrier,” Sen. Taylor said. These new demands will have a substantial impact on the State’s budget.

Puerto Rico

“My colleagues and I conveyed our desire to partner with our Federal counterparts so that the relief efforts can help the most vulnerable and worst affected citizens in our jurisdictions. I especially stressed the need for a new energy grid in Puerto Rico. We cannot merely patch up the old and outdated grid. We must have a modern grid with a renewable energy portfolio that is up to 21st Century standards.”— Eduardo BhatiaSenate Minority LeaderCision PR Newswire, Oct. 5, 2017

Sen. Eduardo Bhatia of Puerto Rico reported that the 3.4 million Americans who live in Puerto Rico have been without power or clean water for 120 days since Hurricane Maria devastated the Island, and predicted that it will take months to restore these services. The economy is obliterated. There is no sales tax revenue. Industry is decimated. Crews from mainland US are helping to rebuild the power grid, but the process is slow. To date only 50% of the Island has had electricity restored. By November, more than 140,000 Puerto Ricans had left the island, leaving few professional and skilled laborers behind. Some experts estimate more than 300,000 more could leave in the next two years. An emergency of this unprecedented scale requires us to revisit all of our policies.

Sen. Bhatia warned that extreme weather challenges ahead could affect many States. “The Atlantic Ocean is warming and this drives extreme seasons. What happened in Puerto Rico could happen in all the coastal States,” he concluded.

Speaker Biography

Corina Eckl

Corina Eckl is Director of Leaders Services for the National Conference of State Legislatures (NCSL). In this capacity she plans meetings and training programs for top legislative leaders in the states and U.S. territories.

Prior to her current position, Ms. Eckl served as director of State Services managing the conference’s core programs, which include fiscal affairs, legislative management, and leaders’ services. Prior to that, she was the long-time director of NCSL’s Fiscal Affairs Program. She has written extensively on state-budget and tax issues and regularly provides information on state-budget conditions and other fiscal matters to legislatures, trade associations, and members of the national print and television media. Ms. Eckl has been quoted in The Wall Street Journal, The New York Times, Financial Times, USA Today, and The Christian Science Monitor, among others, and has appeared on CBS, CNBC, FOX, ABC, CNN, and the BBC. She has been interviewed numerous times for National Public Radio.

Ms. Eckl serves as a consultant on NCSL’s evaluations of legislative organization and staff operations and is the NCSL liaison to the Hawaii Legislature. She also has represented the NCSL on assignments to Algeria, France, Germany, South Africa, Indonesia, Nigeria, and Saudi Arabia. An NCSL staff member since 1984, Ms. Eckl holds a Master’s Degree in Public Administration from the University of Colorado in Boulder.

The average growth in 2018 State general fund revenues is projected to increase 3.9% with expenditures increasing by 3.3%.

 “Economic expansions do not simply die of old age, but are terminated by unpredictable shocks. The next recession will come out of the blue, just like all of its predecessors.”

Bob Hall
Chairman, National Bureau of Economic Research’s Business Cycle Dating Committee
The Economist
2014

Sen. Brent Hill (ID)

Sen. Wayne Niederhauser (UT)

Sen. Jonathan Dismang (AR)

Sen. Margaret O’Brien (MI)

Sen. David Long (IN)

Sen. Bob Peterson (OH)

Sen. John Alario (LA)

Sen. Nicole Poore (DE)

Sen. Mark Pacheco (MA)

Sen. John Cullerton (IL)

Sen. Michelle Fischbach (MN)

Sen. Rich Wardner (ND)

Sen. Frank Lombardo (RI)

Sen. Scott Sales (MT)

Sen. Eli Bebout (WY)

Sen. Ginny Burdick (OR)

Sen. Larry Taylor (TX)

Sen. Eduardo Bhatia (PR)

Corina Eckl

CONTACT

Senate Presidents’ Forum

26 Main Street

Hastings-on-Hudson, NY 10706

 

Tel: 914-693-1818

Copyright © 2017 Senate Presidents' Forum. All rights reserved.

JANUARY 11–14, 2018

The State of the State Budgets

Corina Eckl

Director
Leaders' Services
National Conference of State Legislatures

After several challenging fiscal years, Ms. Eckl’s 2018 report was more optimistic. She reported that State finances largely are stable with revenues and State spending mostly on target with projections. However, the outlook is mixed due to slow and modest growth and uncertainty about Federal tax reform, which complicates State fiscal decisions.

Revenue vs Expenditures

The average growth in 2018 State general fund revenues is projected to increase 3.9% with expenditures increasing by 3.3%, compared with last year’s increases of 3.4% in spending versus 1.9% increase in revenues. On average, State general fund revenues are made up of personal income taxes (about 36%), sales and use taxes (32%), and corporate taxes (5.7%).  Ms. Eckl reported that 41% of States expect to meet or exceed projection targets, while only 4% predict shortfalls. However, Ms. Eckl pointed out that revenues have frequently fallen short of projections, and the large reserves reported by Texas and Alaska drive the overall balance up. Without them, the forecast is much lower.

The average growth in 2018 State general fund revenues is projected to increase 3.9% with expenditures increasing by 3.3%.

Eternal Expansion?

The current economic expansion has lasted 102 months, second only to the 120-month expansion in 1991, and exceeding the post-World War II average of 58.4 months. While some economists believe that the expansion could continue for 2 years longer, others say a shock to the system such as a stock market failure or a change in oil prices could precipitate the end of expansion. Others contend that people’s spending behaviors change over the course of a long expansion, and this could lead to a gradual tapering off of the expansion.

 “Economic expansions do not simply die of old age, but are terminated by unpredictable shocks. The next recession will come out of the blue, just like all of its predecessors.”Bob Hall
Chairman, National Bureau of Economic Research’s Business Cycle Dating Committee
The Economist
2014

Federal Tax Reform

Expanding the tax base is the major thrust of current tax reform, Ms. Eckl said and, according to the Tax Foundation, most states will see revenue increases if they conform to federal tax definitions for personal and corporate income taxes, as most do. Conforming simplifies compliance for filers and reduces administrative burden for the States. However, Ms. Eckl noted that States are just beginning to explore the impact on their revenues, and this could offer opportunities for States to implement their own tax reforms.

State-by-State Discussion

A hallmark of Ms. Eckl’s annual presentation is a deep dive into each of the State’s current fiscal situation. Framed by quotes from State leaders, she asks Forum participants to comment on the conditions in their respective States.

 

Idaho

Sen. Brent Hill (ID)

“Every time you have a change that you’re conforming to in the federal law, it’s somewhat of a guess how much effect that’s going to have on your state revenues. And when you’re guessing, you don’t have to be off very far to find yourself with a shortfall…”— Brent HillSenate PresidentThe Hill, Jan. 9, 2018

Sen. Brent Hill (ID) commented that it is “a shot in the dark” to predict the impact of tax reform. Idaho will conform to the new tax reforms, he said, but may create a Child Tax Credit to balance against the exemption loss. However, he noted that Idaho has the fastest growing population among the States.

“People are moving here from more regulated States. And the State invests in workforce development, for example, increasing public education funding by 23% over the past 3 years. Idaho also has low taxes and low energy costs, a diversified economy, and is first in construction jobs,” he noted. As a result, personal income and sales taxes, which make up about three-fourths of Idaho’s general revenues, also are increasing, and the State expects to exceed its revenue projections.

Utah

Sen. Wayne Niederhauser (UT)

“These consensus figures are encouraging and good news for our economy, but we must continue to be conservative when examining the entire budget to ensure we find the correct fiscal balance.”— Wayne NiederhauserSenate PresidentKSL, Dec. 13, 2017

Utah is the third fastest growing State, with an anticipated $500 million of extra revenue in the 2018 budget. Sen. Wayne Niederhauser (UT) remarked that growth also poses challenges, especially in the need for expanded infrastructure, which is expensive to build. He observed that the State’s universities are attracting engineering, biomedical, cancer research, and high-technology industries to the State. Revenue increases are critical to provide funding for needed infrastructure. “The challenge is to be disciplined and not spend every extra dime we’ve got. We are supporting that fiscal discipline by examining trends over time. We are committing growth revenue to one-time investments rather than starting up programs that would have to be terminated in a downturn,” Sen. Niederhauser said.

Arkansas

Sen. Jonathan Dismang (AR)

“The past year has been eventful for State government, and the development that may have the most positive long-term impact for the Arkansas economy was passage by the legislature of a $50 million a year tax cut for low-income families.”— State Capitol Week
in Review
Jan. 1, 2018

Tax reform in Arkansas parallels the federal direction, seeking to broaden the tax base while lowering taxes overall, Sen. Jonathan Dismang (AR) reported. The State currently has a complex patchwork of tax cuts and exemptions. A Task Force has been convened to review the Tax Code.

According to Sen. Dismang, the State’s economy is good, but Medicaid expansion continues to pose challenges. Arkansas had projected $100 million in Medicaid savings, but this evaporated due to Federal Medical Assistance Percentage (FMAP) cuts. Despite this, the outlook is good, Sen. Dismang said. For example, December sales taxes netted $10 million over forecast, suggesting that box stores are overcoming online competitors with better pricing and shipping policies.

Michigan

Sen. Margaret O’Brien (MI)

“We believe that the outlook remains favorable for Michigan to continue its comeback story. If our forecast proves correct, Michigan’s economic recovery will extend to over 10 years—among the longest continuous stretches of job growth in the state since the Great Depression.”— University of MichiganMiBiz, Jan. 3, 2018

Michigan’s revenues fell to 1960’s levels after the 2008 downturn. In 2011-2012, the State experienced stabilization rather than recovery. The State is still losing population and is second in the US for foreclosures. However, the outlook is optimistic. The State is currently at 1968 revenue levels and is expected to meet its 2018 forecast thanks to higher sales tax revenues that will compensate for below-estimate personal income taxes. Based on conservative projections, the 2017-2018 budget is likely to produce a surplus, Sen. O’Brien said.

Infrastructure improvements are key challenges facing Michigan, and the legislature committed infrastructure investments to be phased in over 2018-2019. Sen. O’Brien pointed out that State and Federal road-building funds dictate specifications that may not be appropriate for all neighborhoods. She advocated for State and local alliances to define how funds for infrastructure should be spent.

Indiana

Sen. David Long (IN)

“This session, we will continue to fight the opioid epidemic, look for ways to improve our work-force development efforts and support our schools. We will also be working to improve civil forfeiture laws and will work to allow the carryout sale of alcohol on Sundays. There is a lot of work to be done in the coming months on all of these issues, but our caucus is ready to take on those challenges. We look forward to the session ahead."— David LongSenate PresidentMyWabashValley, Jan. 8, 2018

While Indiana’s personal income taxes and sales taxes are on target, corporate taxes may fall $400 million short of projections. Sen. David Long (IN) explained that the State is in good fiscal shape and, therefore, has been able to cut corporate taxes repeatedly. They currently have the lowest unemployment rate in the Midwest, are at full employment, and are actively seeking more workers to fill jobs. The State’s infrastructure is in good shape, he said, and a new gas tax will fully fund a $1.2 billion transportation plan to keep infrastructure up-to-date with demands. Indiana anticipates that Federal tax reforms will be a net win for the State, with more revenue coming into the general fund.

The biggest challenge for Indiana is the opioid crisis, Sen. Long said. “We need triple the former number of foster parents to provide care for children whose parents have been lost to opioids. It is hard to keep case workers, where first-year turnover rates are at 47%. The costs of this epidemic keep escalating,” he reported.

Ohio

Sen. Bob Peterson (OH)

“We tackled a very challenging budget cycle, one where we faced a gap of about $1.1 billion, where frankly the existence of the gap wasn’t widely acknowledged until the middle of April. We had very little time to make a lot of tough decisions. If you look at where we were at this point a year ago and where we are now with the prior budget and this one, we are right on track with the revenues coming in every month.”— Larry ObhofSenate PresidentToledo Blade, Dec. 29, 2017

Ohio has seen a slow but steady improvement in the fiscal outlook, and Sen. Bob Peterson (OH) says he anticipates that the State will meet its 2018 forecasts. He pointed out that Ohio has lowered taxes and, as a result, has created many jobs. Unfortunately, Ohio lacks workers with the requisite skills. Now, the focus is on workforce development to trained qualified workers for those jobs. The legislature also allocates a capitol budget every 2 years. For the past 6 years, funds have flowed back to the districts, but prioritizing projects for these funds is a challenge, Sen. Peterson said.

Louisiana

Sen. John Alario (LA)

According to a Dec. 14 article in The Advocate, Louisiana’s income projections have improved, but state officials were muted in their excitement because a nearly $1 billion budget gap still looms next year. “It’s not time to go out and break the champagne bottle.”— John AlarioSenate PresidentThe Times-Picayune,
Sept. 21, 2017

A couple of years ago, Louisiana had a $2 billion budget gap, Sen. John Alario (LA) reminded the Forum. “We solved that through program cuts, streamlining services, and approving a 1 cent sales tax increase (from 4% to 5%), which is about to expire. The loss of that 1 cent tax increase is contributing to the $1 billion gap,” he said. The State has the highest sales tax in the US. Still, a step toward addressing the budget gap may be to reduce the sales tax by half a cent, rather than sacrificing the whole 1 cent, Sen. Alario said.

The State also is adjusting its sales tax brackets, and exemptions have been cut by 28%. The Federal reforms also will help by allowing fewer itemized deductions. The Governor is presenting a budget with $1 billion in cuts in higher education and health care.  Such difficult cuts may make people more accepting of a sales tax, Sen. Alario concluded.

Sen. Danny Martiny (LA) echoed Sen. Alario’s remarks. He noted that a special session would be required to address the budget issues in 2018, when the budget is not on the legislative agenda. The Democratic Governor is asking for tax reform but refuses to call a special session without a consensus. Meanwhile, politics have plagued the budget process. Republican legislators refuse to cooperate in a consensus discussion, forcing the Governor to take the blame for an Executive Budget that is $1 billion short, Sen. Martiny said.

Delaware

Sen. Nicole Poore (DE)

“In recent years, state tax revenues have fallen short of expectations, forcing midyear cuts and one-time solutions to balance the budget. State tax revenues aren’t keeping up with the state’s economy.”— State House News ServiceJan. 3, 2018

“The Delaware legislature listened to business needs and introduced bills to help our businesses stay competitive,” Sen. Nicole Poore (DE) reported. The bills gave companies better incentives to stay in the State, companies such as Nemours and Dupont, which contributes $8 billion in revenue, thus preserving jobs and corporate taxes.

Last year saw a $400 million deficit in the budget, but 2018 projections show a $30 million increase in revenue. “It required a Special Session to come to an agreement about the 2018 budget,” Sen. Poore said, “Bipartisan negotiation—a good kind of fighting—allowed us to come to agreement.”

The biggest challenge facing Delaware is the opioid crisis, Sen. Poore noted. “There is not enough funding to address the problem. We need to have programs, support services, and follow-up after detoxification to keep people off drugs. They have to fight that fight every day. When they become stable they are taxpayers, part of the society, and not a drain on it,” she concluded.

Massachusetts

Sen. Mark Pacheco (MA)

Referring to budget sustainability:“I think having bipartisanship will help us make sure we're making the right decisions in the state of Delaware. Ultimately we want to focus on the economy, what works best for the people and have a level playing field."— Nicole PooreSenate Majority WhipWDEL, Jan. 8, 2017

Massachusetts expects to meet its 2018 forecast projections, according to Sen. Mark Pacheco (MA). The economy is improving with substantial construction underway in the cities, creating many new jobs, and reducing unemployment to 3.7%. Revenues in 2017 were $730 million ahead of projections through the end of December. However, tax reform is causing legislators to be cautious about an apparent surplus. “People may be making prepayments on their 2018 taxes, and the surplus may be illusory. What will happen next year?” Sen. Pacheco queried.

Medicaid, which consumes $10-11 billion of the state budget, continues to be the biggest challenge in Massachusetts, Sen. Pacheco noted. While the Federal government seeks to reduce the deficit through tax reform, Federal proposals to cut Medicaid by 30% would have a $3 billion impact on Massachusetts. It is uncertain what the next Federal changes in healthcare and Medicaid will be and how they will affect the States, Sen. Pacheco observed.

Massachusetts is a ballot-measure State with two taxes on the ballot. The popular “Millionaire Tax” would impose a 4% surcharge on income over $1 million and allocates the revenue to education and transportation. However, on the loss side, there is a ballot issue to decrease the sales tax, which would force program cuts.

Previously, a citizen ballot led to repeal of the gas tax, which has put infrastructure improvements at risk. “The State needs new revenue to invest in transportation, commuter rail, and improvements that affect the regional economy of all of New England. Fortunately, the legislature and the Governor have a cooperative relationship and these issues will be addressed,” Sen. Pacheco concluded.

Illinois

Sen. John Cullerton (IL)

“For the past several weeks, Senate Republican Leader Radogno and I have been talking about how to solve the problems of our State. It’s been a very frank discussion, and we have a lot of realities to face. I think we in the Senate recognize the problems, and that we are potentially close to an agreement on how to solve them, but we’re not quite there.”— John CullertonSenate PresidentVoices in the News, Dec. 29, 2017

Last year, Illinois’ personal income and sales taxes came in below estimates, and 2018 forecasts have been adjusted downward, Sen. John Cullerton (IL) reported. For several years, Illinois has operated without a passed budget and has overspent by $7 billion per year, creating a $16 billion deficit. In a determined bipartisan effort to reach agreement, legislators produced a budget that required significant reforms and reinstated a 4.9% flat personal income tax (excluding retirement income).  The Republican Governor vetoed the budget but was overridden by Republicans in the House. Currently, a contentious gubernatorial race is underway and the legislature’s goal is simply to pass a budget and undertake no major initiatives until after the election, Sen. Cullerton said.

Minnesota

Sen. Michelle Fischbach (MN)

“A deficit of $188 million is projected for the FY 2018-19 biennium. The forecast doesn’t factor in nearly $120 million in operating funding for the Minnesota House and Senate, which the governor vetoed last spring.”—The Associated PressDec. 6, 2017

Minnesota Governor’s line item veto of $120 million in funding for the legislature at the very end of the session led to a Supreme Court challenge, reported Sen. Michelle Fischbach (MN). The Supreme Court ruled that the Governor did have the authority for the veto and sent the parties to mediation, which failed. The House and Senate dipped into their “carry forward” Legislative Coordinating Commission funds to keep functioning.

Now the legislature is back at full staff and has a Gentlemen’s Agreement with the Governor to pass a legislative budget, which the Governor agrees to sign. This struggle is indicative of the contentious relations between the Governor and the legislature. The party split is 33 Democratic to 34 Republican in the legislature. With Sen. Al Franken’s departure from the US Senate, the lieutenant governor moved to the US Senate, leaving her position vacant. Sen Fischbach (a Republican) was tapped for lieutenant governor but was also able to retain her Senate position, she reported.

Commenting on the budget, Sen. David Senjem (MN) noted that in 2008, Minnesota faced a $6.2 billion deficit, so the current budget deficit of $188 million is manageable, especially as the State has $2 billion in its Rainy Day Fund. He anticipates an additional $800 million in revenue from Federal tax reform. Minnesota’s infrastructure is crumbling, Sen. Senjem observed, and it will require hundreds of millions of dollars to fix it, he concluded.

North Dakota

Sen. Rich Wardner (ND)

“Many top lawmakers have been critical of how revenue forecasts have been crafted and explored options of doing their own. But earlier this year, Gov. Doug Burgum vetoed a section of a bill that would create a legislative panel allowing lawmakers to pursue the idea. The Legislature instead created an interim committee that was out of the governor’s reach.”— The Associated PressDec. 5, 2017

North Dakota does not have a legislative session this year, but Sen. Rich Wardner (ND) noted that the forecast is on target. He also reported that the legislature had sued the Governor, a newcomer to politics, not over any significant issues, but as a way to clarify the roles of the Governor and the legislature.

Rhode Island

Sen. Frank Lombardo (RI)

“Rhode Island state officials say they will have to keep a close eye on spending and hiring in order to close a daunting budget gap, but worry the governor’s administration is showing a lack of urgency.”— The Associated PressDec. 6, 2017

Sen. Frank Lombardo (RI) reported that, despite a current $60 million deficit, the Governor’s budget proposed a $500 million infrastructure investment. Meanwhile, the amount that Rhode Islanders pay in car tax over the next fiscal year was reduced by about $26 million, which the state will reimburse to cities and towns. The Senate also approved a bill requiring the state to file reports, beginning in 2021, on the sustainability of eliminating the car tax, a strategy that failed in prior years when recessions hit. Sen. Lombardo summed up the current fiscal situation saying, “We need to put the brakes on borrowing.”

Montana

Sen. Scott Sales (MT)

“Montana’s revenue forecast is murky at this point as experts try to predict how taxpayers will respond to the new law and how that law meshes with Montana State tax laws. A revenue committee meeting is scheduled for March and state officials expect to have a clearer picture by then.”— Newstalk KGVO.comJan. 9, 2018

Montana’s revenue forecasts are “all over the map and change every day,” according to Sen. Scott Sales (MT), citing a range of estimated shortfalls from $250 million to $46 million. What is clear is that the State is unlikely to meet its forecast. In Montana, where the Governor is a Democrat and the legislature is Republican, the legislature is happy to let the Governor make the necessary cuts to address the shortfall, and take the political fall-out. Sen. Sales concluded saying, “I love when we’re out of money. It forces us to examine what we have been doing with our budget.”

Wyoming

Sen. Eli Bebout (WY)

“Diversifying Wyoming’s economy for the long term is no easy task, but it is the most pressing challenge we face. Moving forward, we must balance the realities of our state’s fiscal situation with strategic investments. I remain cautiously optimistic that we can do just that during the upcoming legislative session. After all, if not now, when?”— Eli BeboutSenate PresidentCounty 10, Jan. 3, 2018

The biggest concern for Wyoming is diversifying the economy. Currently, 70% of Wyoming’s $3 billion general fund revenue is derived from minerals. The slump in oil, natural gas and coal prices meant the State lost half of its budget, reported Sen. Eli Bebout (WY). Now legislators are trying to balance the budget and be prudent with their savings. The State has a constitutional requirement to maintain certain funds, restricting use to the interest generated. For example, the State’s Legislative Stabilization Reserve Account or rainy day fund, holds $1.5 billion. “It could be a temptation to use that money,” Sen. Bebout said, “but we are fiscally conservative and are looking to reduce government.” The biggest challenge is funding for K-12 education, the Senator said. However, he added, out of adversity comes opportunity. With tax reform, we can broaden our tax base and diversify our economy.

Oregon

Sen. Ginny Burdick (OR)

“Lawmakers passed the biggest state infrastructure funding plan in a generation this year by passing a $5.3 billion package of new taxes and fees. The bill ended up passing with generous bipartisan support.”— The Oregonian/Oregon.LiveDec. 30, 2017

Sen. Ginny Burdick (OR) reflected that the State’s economy is performing well and will likely exceed expectations. However, Medicaid funding is a key challenge. The legislature proposed a bipartisan bill to fund Medicaid expansion, but the issue became a ballot initiative. If funding for expansion is defeated, 350,000 people will lose Medicaid coverage, the Senator reported.

Texas

Sen. Larry Taylor (TX)

“[Texas] Senators voiced hope that actions by the Trump administration would ease some strains on the budget, including the $800 million they plan to spend on border security over the next two years, and allow them to put more funding into other areas such as education.” “Senate leaders warned Tuesday that Hurricane Harvey could put a billion-dollar hole in the Texas budget, an ever-growing amount that could affect how much money is available for other state programs.”— The Houston ChronicleDec. 6, 2017

Hurricane Harvey has had a $1 billion impact on funding for education, Sen. Larry Taylor (TX) pointed out. Education accounts for half of the State’s budget, and these funds had to be reallocated to provide services for homeless people displaced by the storm. Additional funds are desperately needed to rebuild infrastructure. “The storm has forced us to consider strategies for hurricane mitigation, such as building a coastal barrier,” Sen. Taylor said. These new demands will have a substantial impact on the State’s budget.

Puerto Rico

Sen. Eduardo Bhatia (PR)

“My colleagues and I conveyed our desire to partner with our Federal counterparts so that the relief efforts can help the most vulnerable and worst affected citizens in our jurisdictions. I especially stressed the need for a new energy grid in Puerto Rico. We cannot merely patch up the old and outdated grid. We must have a modern grid with a renewable energy portfolio that is up to 21st Century standards.”— Eduardo BhatiaSenate Minority LeaderCision PR Newswire, Oct. 5, 2017

Sen. Eduardo Bhatia of Puerto Rico reported that the 3.4 million Americans who live in Puerto Rico have been without power or clean water for 120 days since Hurricane Maria devastated the Island, and predicted that it will take months to restore these services. The economy is obliterated. There is no sales tax revenue. Industry is decimated. Crews from mainland US are helping to rebuild the power grid, but the process is slow. To date only 50% of the Island has had electricity restored. By November, more than 140,000 Puerto Ricans had left the island, leaving few professional and skilled laborers behind. Some experts estimate more than 300,000 more could leave in the next two years. An emergency of this unprecedented scale requires us to revisit all of our policies.

Sen. Bhatia warned that extreme weather challenges ahead could affect many States. “The Atlantic Ocean is warming and this drives extreme seasons. What happened in Puerto Rico could happen in all the coastal States,” he concluded.

Speaker Biography

Corina Eckl

Corina Eckl is Director of Leaders Services for the National Conference of State Legislatures (NCSL). In this capacity she plans meetings and training programs for top legislative leaders in the states and U.S. territories.

Prior to her current position, Ms. Eckl served as director of State Services managing the conference’s core programs, which include fiscal affairs, legislative management, and leaders’ services. Prior to that, she was the long-time director of NCSL’s Fiscal Affairs Program. She has written extensively on state-budget and tax issues and regularly provides information on state-budget conditions and other fiscal matters to legislatures, trade associations, and members of the national print and television media. Ms. Eckl has been quoted in The Wall Street Journal, The New York Times, Financial Times, USA Today, and The Christian Science Monitor, among others, and has appeared on CBS, CNBC, FOX, ABC, CNN, and the BBC. She has been interviewed numerous times for National Public Radio.

Ms. Eckl serves as a consultant on NCSL’s evaluations of legislative organization and staff operations and is the NCSL liaison to the Hawaii Legislature. She also has represented the NCSL on assignments to Algeria, France, Germany, South Africa, Indonesia, Nigeria, and Saudi Arabia. An NCSL staff member since 1984, Ms. Eckl holds a Master’s Degree in Public Administration from the University of Colorado in Boulder.

JANUARY 11–14, 2018

The State of the State Budgets

Corina Eckl

Director
Leaders' Services
National Conference of State Legislatures

After several challenging fiscal years, Ms. Eckl’s 2018 report was more optimistic. She reported that State finances largely are stable with revenues and State spending mostly on target with projections. However, the outlook is mixed due to slow and modest growth and uncertainty about Federal tax reform, which complicates State fiscal decisions.

Revenue vs Expenditures

The average growth in 2018 State general fund revenues is projected to increase 3.9% with expenditures increasing by 3.3%, compared with last year’s increases of 3.4% in spending versus 1.9% increase in revenues. On average, State general fund revenues are made up of personal income taxes (about 36%), sales and use taxes (32%), and corporate taxes (5.7%).  Ms. Eckl reported that 41% of States expect to meet or exceed projection targets, while only 4% predict shortfalls. However, Ms. Eckl pointed out that revenues have frequently fallen short of projections, and the large reserves reported by Texas and Alaska drive the overall balance up. Without them, the forecast is much lower.

The average growth in 2018 State general fund revenues is projected to increase 3.9% with expenditures increasing by 3.3%.

Eternal Expansion?

The current economic expansion has lasted 102 months, second only to the 120-month expansion in 1991, and exceeding the post-World War II average of 58.4 months. While some economists believe that the expansion could continue for 2 years longer, others say a shock to the system such as a stock market failure or a change in oil prices could precipitate the end of expansion. Others contend that people’s spending behaviors change over the course of a long expansion, and this could lead to a gradual tapering off of the expansion.

 “Economic expansions do not simply die of old age, but are terminated by unpredictable shocks. The next recession will come out of the blue, just like all of its predecessors.”Bob Hall
Chairman, National Bureau of Economic Research’s Business Cycle Dating Committee
The Economist
2014

Federal Tax Reform

Expanding the tax base is the major thrust of current tax reform, Ms. Eckl said and, according to the Tax Foundation, most states will see revenue increases if they conform to federal tax definitions for personal and corporate income taxes, as most do. Conforming simplifies compliance for filers and reduces administrative burden for the States. However, Ms. Eckl noted that States are just beginning to explore the impact on their revenues, and this could offer opportunities for States to implement their own tax reforms.

State-by-State Discussion

A hallmark of Ms. Eckl’s annual presentation is a deep dive into each of the State’s current fiscal situation. Framed by quotes from State leaders, she asks Forum participants to comment on the conditions in their respective States.

 

Idaho

Sen. Brent Hill (ID)

“Every time you have a change that you’re conforming to in the federal law, it’s somewhat of a guess how much effect that’s going to have on your state revenues. And when you’re guessing, you don’t have to be off very far to find yourself with a shortfall…”— Brent HillSenate PresidentThe Hill, Jan. 9, 2018

Sen. Brent Hill (ID) commented that it is “a shot in the dark” to predict the impact of tax reform. Idaho will conform to the new tax reforms, he said, but may create a Child Tax Credit to balance against the exemption loss. However, he noted that Idaho has the fastest growing population among the States.

“People are moving here from more regulated States. And the State invests in workforce development, for example, increasing public education funding by 23% over the past 3 years. Idaho also has low taxes and low energy costs, a diversified economy, and is first in construction jobs,” he noted. As a result, personal income and sales taxes, which make up about three-fourths of Idaho’s general revenues, also are increasing, and the State expects to exceed its revenue projections.

Utah

Sen. Wayne Niederhauser (UT)

“These consensus figures are encouraging and good news for our economy, but we must continue to be conservative when examining the entire budget to ensure we find the correct fiscal balance.”— Wayne NiederhauserSenate PresidentKSL, Dec. 13, 2017

Utah is the third fastest growing State, with an anticipated $500 million of extra revenue in the 2018 budget. Sen. Wayne Niederhauser (UT) remarked that growth also poses challenges, especially in the need for expanded infrastructure, which is expensive to build. He observed that the State’s universities are attracting engineering, biomedical, cancer research, and high-technology industries to the State. Revenue increases are critical to provide funding for needed infrastructure. “The challenge is to be disciplined and not spend every extra dime we’ve got. We are supporting that fiscal discipline by examining trends over time. We are committing growth revenue to one-time investments rather than starting up programs that would have to be terminated in a downturn,” Sen. Niederhauser said.

Arkansas

Sen. Jonathan Dismang (AR)

“The past year has been eventful for State government, and the development that may have the most positive long-term impact for the Arkansas economy was passage by the legislature of a $50 million a year tax cut for low-income families.”— State Capitol Week
in Review
Jan. 1, 2018

Tax reform in Arkansas parallels the federal direction, seeking to broaden the tax base while lowering taxes overall, Sen. Jonathan Dismang (AR) reported. The State currently has a complex patchwork of tax cuts and exemptions. A Task Force has been convened to review the Tax Code.

According to Sen. Dismang, the State’s economy is good, but Medicaid expansion continues to pose challenges. Arkansas had projected $100 million in Medicaid savings, but this evaporated due to Federal Medical Assistance Percentage (FMAP) cuts. Despite this, the outlook is good, Sen. Dismang said. For example, December sales taxes netted $10 million over forecast, suggesting that box stores are overcoming online competitors with better pricing and shipping policies.

Michigan

Sen. Margaret O’Brien (MI)

“We believe that the outlook remains favorable for Michigan to continue its comeback story. If our forecast proves correct, Michigan’s economic recovery will extend to over 10 years—among the longest continuous stretches of job growth in the state since the Great Depression.”— University of MichiganMiBiz, Jan. 3, 2018

Michigan’s revenues fell to 1960’s levels after the 2008 downturn. In 2011-2012, the State experienced stabilization rather than recovery. The State is still losing population and is second in the US for foreclosures. However, the outlook is optimistic. The State is currently at 1968 revenue levels and is expected to meet its 2018 forecast thanks to higher sales tax revenues that will compensate for below-estimate personal income taxes. Based on conservative projections, the 2017-2018 budget is likely to produce a surplus, Sen. O’Brien said.

Infrastructure improvements are key challenges facing Michigan, and the legislature committed infrastructure investments to be phased in over 2018-2019. Sen. O’Brien pointed out that State and Federal road-building funds dictate specifications that may not be appropriate for all neighborhoods. She advocated for State and local alliances to define how funds for infrastructure should be spent.

Indiana

Sen. David Long (IN)

“This session, we will continue to fight the opioid epidemic, look for ways to improve our work-force development efforts and support our schools. We will also be working to improve civil forfeiture laws and will work to allow the carryout sale of alcohol on Sundays. There is a lot of work to be done in the coming months on all of these issues, but our caucus is ready to take on those challenges. We look forward to the session ahead."— David LongSenate PresidentMyWabashValley, Jan. 8, 2018

While Indiana’s personal income taxes and sales taxes are on target, corporate taxes may fall $400 million short of projections. Sen. David Long (IN) explained that the State is in good fiscal shape and, therefore, has been able to cut corporate taxes repeatedly. They currently have the lowest unemployment rate in the Midwest, are at full employment, and are actively seeking more workers to fill jobs. The State’s infrastructure is in good shape, he said, and a new gas tax will fully fund a $1.2 billion transportation plan to keep infrastructure up-to-date with demands. Indiana anticipates that Federal tax reforms will be a net win for the State, with more revenue coming into the general fund.

The biggest challenge for Indiana is the opioid crisis, Sen. Long said. “We need triple the former number of foster parents to provide care for children whose parents have been lost to opioids. It is hard to keep case workers, where first-year turnover rates are at 47%. The costs of this epidemic keep escalating,” he reported.

Ohio

Sen. Bob Peterson (OH)

“We tackled a very challenging budget cycle, one where we faced a gap of about $1.1 billion, where frankly the existence of the gap wasn’t widely acknowledged until the middle of April. We had very little time to make a lot of tough decisions. If you look at where we were at this point a year ago and where we are now with the prior budget and this one, we are right on track with the revenues coming in every month.”— Larry ObhofSenate PresidentToledo Blade, Dec. 29, 2017

Ohio has seen a slow but steady improvement in the fiscal outlook, and Sen. Bob Peterson (OH) says he anticipates that the State will meet its 2018 forecasts. He pointed out that Ohio has lowered taxes and, as a result, has created many jobs. Unfortunately, Ohio lacks workers with the requisite skills. Now, the focus is on workforce development to trained qualified workers for those jobs. The legislature also allocates a capitol budget every 2 years. For the past 6 years, funds have flowed back to the districts, but prioritizing projects for these funds is a challenge, Sen. Peterson said.

Louisiana

Sen. John Alario (LA)

According to a Dec. 14 article in The Advocate, Louisiana’s income projections have improved, but state officials were muted in their excitement because a nearly $1 billion budget gap still looms next year. “It’s not time to go out and break the champagne bottle.”— John AlarioSenate PresidentThe Times-Picayune,
Sept. 21, 2017

A couple of years ago, Louisiana had a $2 billion budget gap, Sen. John Alario (LA) reminded the Forum. “We solved that through program cuts, streamlining services, and approving a 1 cent sales tax increase (from 4% to 5%), which is about to expire. The loss of that 1 cent tax increase is contributing to the $1 billion gap,” he said. The State has the highest sales tax in the US. Still, a step toward addressing the budget gap may be to reduce the sales tax by half a cent, rather than sacrificing the whole 1 cent, Sen. Alario said.

The State also is adjusting its sales tax brackets, and exemptions have been cut by 28%. The Federal reforms also will help by allowing fewer itemized deductions. The Governor is presenting a budget with $1 billion in cuts in higher education and health care.  Such difficult cuts may make people more accepting of a sales tax, Sen. Alario concluded.

Sen. Danny Martiny (LA) echoed Sen. Alario’s remarks. He noted that a special session would be required to address the budget issues in 2018, when the budget is not on the legislative agenda. The Democratic Governor is asking for tax reform but refuses to call a special session without a consensus. Meanwhile, politics have plagued the budget process. Republican legislators refuse to cooperate in a consensus discussion, forcing the Governor to take the blame for an Executive Budget that is $1 billion short, Sen. Martiny said.

Delaware

Sen. Nicole Poore (DE)

“In recent years, state tax revenues have fallen short of expectations, forcing midyear cuts and one-time solutions to balance the budget. State tax revenues aren’t keeping up with the state’s economy.”— State House News ServiceJan. 3, 2018

“The Delaware legislature listened to business needs and introduced bills to help our businesses stay competitive,” Sen. Nicole Poore (DE) reported. The bills gave companies better incentives to stay in the State, companies such as Nemours and Dupont, which contributes $8 billion in revenue, thus preserving jobs and corporate taxes.

Last year saw a $400 million deficit in the budget, but 2018 projections show a $30 million increase in revenue. “It required a Special Session to come to an agreement about the 2018 budget,” Sen. Poore said, “Bipartisan negotiation—a good kind of fighting—allowed us to come to agreement.”

The biggest challenge facing Delaware is the opioid crisis, Sen. Poore noted. “There is not enough funding to address the problem. We need to have programs, support services, and follow-up after detoxification to keep people off drugs. They have to fight that fight every day. When they become stable they are taxpayers, part of the society, and not a drain on it,” she concluded.

Massachusetts

Sen. Mark Pacheco (MA)

Referring to budget sustainability:“I think having bipartisanship will help us make sure we're making the right decisions in the state of Delaware. Ultimately we want to focus on the economy, what works best for the people and have a level playing field."— Nicole PooreSenate Majority WhipWDEL, Jan. 8, 2017

Massachusetts expects to meet its 2018 forecast projections, according to Sen. Mark Pacheco (MA). The economy is improving with substantial construction underway in the cities, creating many new jobs, and reducing unemployment to 3.7%. Revenues in 2017 were $730 million ahead of projections through the end of December. However, tax reform is causing legislators to be cautious about an apparent surplus. “People may be making prepayments on their 2018 taxes, and the surplus may be illusory. What will happen next year?” Sen. Pacheco queried.

Medicaid, which consumes $10-11 billion of the state budget, continues to be the biggest challenge in Massachusetts, Sen. Pacheco noted. While the Federal government seeks to reduce the deficit through tax reform, Federal proposals to cut Medicaid by 30% would have a $3 billion impact on Massachusetts. It is uncertain what the next Federal changes in healthcare and Medicaid will be and how they will affect the States, Sen. Pacheco observed.

Massachusetts is a ballot-measure State with two taxes on the ballot. The popular “Millionaire Tax” would impose a 4% surcharge on income over $1 million and allocates the revenue to education and transportation. However, on the loss side, there is a ballot issue to decrease the sales tax, which would force program cuts.

Previously, a citizen ballot led to repeal of the gas tax, which has put infrastructure improvements at risk. “The State needs new revenue to invest in transportation, commuter rail, and improvements that affect the regional economy of all of New England. Fortunately, the legislature and the Governor have a cooperative relationship and these issues will be addressed,” Sen. Pacheco concluded.

Illinois

Sen. John Cullerton (IL)

“For the past several weeks, Senate Republican Leader Radogno and I have been talking about how to solve the problems of our State. It’s been a very frank discussion, and we have a lot of realities to face. I think we in the Senate recognize the problems, and that we are potentially close to an agreement on how to solve them, but we’re not quite there.”— John CullertonSenate PresidentVoices in the News, Dec. 29, 2017

Last year, Illinois’ personal income and sales taxes came in below estimates, and 2018 forecasts have been adjusted downward, Sen. John Cullerton (IL) reported. For several years, Illinois has operated without a passed budget and has overspent by $7 billion per year, creating a $16 billion deficit. In a determined bipartisan effort to reach agreement, legislators produced a budget that required significant reforms and reinstated a 4.9% flat personal income tax (excluding retirement income).  The Republican Governor vetoed the budget but was overridden by Republicans in the House. Currently, a contentious gubernatorial race is underway and the legislature’s goal is simply to pass a budget and undertake no major initiatives until after the election, Sen. Cullerton said.

Minnesota

Sen. Michelle Fischbach (MN)

“A deficit of $188 million is projected for the FY 2018-19 biennium. The forecast doesn’t factor in nearly $120 million in operating funding for the Minnesota House and Senate, which the governor vetoed last spring.”—The Associated PressDec. 6, 2017

Minnesota Governor’s line item veto of $120 million in funding for the legislature at the very end of the session led to a Supreme Court challenge, reported Sen. Michelle Fischbach (MN). The Supreme Court ruled that the Governor did have the authority for the veto and sent the parties to mediation, which failed. The House and Senate dipped into their “carry forward” Legislative Coordinating Commission funds to keep functioning.

Now the legislature is back at full staff and has a Gentlemen’s Agreement with the Governor to pass a legislative budget, which the Governor agrees to sign. This struggle is indicative of the contentious relations between the Governor and the legislature. The party split is 33 Democratic to 34 Republican in the legislature. With Sen. Al Franken’s departure from the US Senate, the lieutenant governor moved to the US Senate, leaving her position vacant. Sen Fischbach (a Republican) was tapped for lieutenant governor but was also able to retain her Senate position, she reported.

Commenting on the budget, Sen. David Senjem (MN) noted that in 2008, Minnesota faced a $6.2 billion deficit, so the current budget deficit of $188 million is manageable, especially as the State has $2 billion in its Rainy Day Fund. He anticipates an additional $800 million in revenue from Federal tax reform. Minnesota’s infrastructure is crumbling, Sen. Senjem observed, and it will require hundreds of millions of dollars to fix it, he concluded.

North Dakota

Sen. Rich Wardner (ND)

“Many top lawmakers have been critical of how revenue forecasts have been crafted and explored options of doing their own. But earlier this year, Gov. Doug Burgum vetoed a section of a bill that would create a legislative panel allowing lawmakers to pursue the idea. The Legislature instead created an interim committee that was out of the governor’s reach.”— The Associated PressDec. 5, 2017

North Dakota does not have a legislative session this year, but Sen. Rich Wardner (ND) noted that the forecast is on target. He also reported that the legislature had sued the Governor, a newcomer to politics, not over any significant issues, but as a way to clarify the roles of the Governor and the legislature.

Rhode Island

Sen. Frank Lombardo (RI)

“Rhode Island state officials say they will have to keep a close eye on spending and hiring in order to close a daunting budget gap, but worry the governor’s administration is showing a lack of urgency.”— The Associated PressDec. 6, 2017

Sen. Frank Lombardo (RI) reported that, despite a current $60 million deficit, the Governor’s budget proposed a $500 million infrastructure investment. Meanwhile, the amount that Rhode Islanders pay in car tax over the next fiscal year was reduced by about $26 million, which the state will reimburse to cities and towns. The Senate also approved a bill requiring the state to file reports, beginning in 2021, on the sustainability of eliminating the car tax, a strategy that failed in prior years when recessions hit. Sen. Lombardo summed up the current fiscal situation saying, “We need to put the brakes on borrowing.”

Montana

Sen. Scott Sales (MT)

“Montana’s revenue forecast is murky at this point as experts try to predict how taxpayers will respond to the new law and how that law meshes with Montana State tax laws. A revenue committee meeting is scheduled for March and state officials expect to have a clearer picture by then.”— Newstalk KGVO.comJan. 9, 2018

Montana’s revenue forecasts are “all over the map and change every day,” according to Sen. Scott Sales (MT), citing a range of estimated shortfalls from $250 million to $46 million. What is clear is that the State is unlikely to meet its forecast. In Montana, where the Governor is a Democrat and the legislature is Republican, the legislature is happy to let the Governor make the necessary cuts to address the shortfall, and take the political fall-out. Sen. Sales concluded saying, “I love when we’re out of money. It forces us to examine what we have been doing with our budget.”

Wyoming

Sen. Eli Bebout (WY)

“Diversifying Wyoming’s economy for the long term is no easy task, but it is the most pressing challenge we face. Moving forward, we must balance the realities of our state’s fiscal situation with strategic investments. I remain cautiously optimistic that we can do just that during the upcoming legislative session. After all, if not now, when?”— Eli BeboutSenate PresidentCounty 10, Jan. 3, 2018

The biggest concern for Wyoming is diversifying the economy. Currently, 70% of Wyoming’s $3 billion general fund revenue is derived from minerals. The slump in oil, natural gas and coal prices meant the State lost half of its budget, reported Sen. Eli Bebout (WY). Now legislators are trying to balance the budget and be prudent with their savings. The State has a constitutional requirement to maintain certain funds, restricting use to the interest generated. For example, the State’s Legislative Stabilization Reserve Account or rainy day fund, holds $1.5 billion. “It could be a temptation to use that money,” Sen. Bebout said, “but we are fiscally conservative and are looking to reduce government.” The biggest challenge is funding for K-12 education, the Senator said. However, he added, out of adversity comes opportunity. With tax reform, we can broaden our tax base and diversify our economy.

Oregon

Sen. Ginny Burdick (OR)

“Lawmakers passed the biggest state infrastructure funding plan in a generation this year by passing a $5.3 billion package of new taxes and fees. The bill ended up passing with generous bipartisan support.”— The Oregonian/Oregon.LiveDec. 30, 2017

Sen. Ginny Burdick (OR) reflected that the State’s economy is performing well and will likely exceed expectations. However, Medicaid funding is a key challenge. The legislature proposed a bipartisan bill to fund Medicaid expansion, but the issue became a ballot initiative. If funding for expansion is defeated, 350,000 people will lose Medicaid coverage, the Senator reported.

Texas

Sen. Larry Taylor (TX)

“[Texas] Senators voiced hope that actions by the Trump administration would ease some strains on the budget, including the $800 million they plan to spend on border security over the next two years, and allow them to put more funding into other areas such as education.” “Senate leaders warned Tuesday that Hurricane Harvey could put a billion-dollar hole in the Texas budget, an ever-growing amount that could affect how much money is available for other state programs.”— The Houston ChronicleDec. 6, 2017

Hurricane Harvey has had a $1 billion impact on funding for education, Sen. Larry Taylor (TX) pointed out. Education accounts for half of the State’s budget, and these funds had to be reallocated to provide services for homeless people displaced by the storm. Additional funds are desperately needed to rebuild infrastructure. “The storm has forced us to consider strategies for hurricane mitigation, such as building a coastal barrier,” Sen. Taylor said. These new demands will have a substantial impact on the State’s budget.

Puerto Rico

Sen. Eduardo Bhatia (PR)

“My colleagues and I conveyed our desire to partner with our Federal counterparts so that the relief efforts can help the most vulnerable and worst affected citizens in our jurisdictions. I especially stressed the need for a new energy grid in Puerto Rico. We cannot merely patch up the old and outdated grid. We must have a modern grid with a renewable energy portfolio that is up to 21st Century standards.”— Eduardo BhatiaSenate Minority LeaderCision PR Newswire, Oct. 5, 2017

Sen. Eduardo Bhatia of Puerto Rico reported that the 3.4 million Americans who live in Puerto Rico have been without power or clean water for 120 days since Hurricane Maria devastated the Island, and predicted that it will take months to restore these services. The economy is obliterated. There is no sales tax revenue. Industry is decimated. Crews from mainland US are helping to rebuild the power grid, but the process is slow. To date only 50% of the Island has had electricity restored. By November, more than 140,000 Puerto Ricans had left the island, leaving few professional and skilled laborers behind. Some experts estimate more than 300,000 more could leave in the next two years. An emergency of this unprecedented scale requires us to revisit all of our policies.

Sen. Bhatia warned that extreme weather challenges ahead could affect many States. “The Atlantic Ocean is warming and this drives extreme seasons. What happened in Puerto Rico could happen in all the coastal States,” he concluded.

Speaker Biography

Corina Eckl

Corina Eckl is Director of Leaders Services for the National Conference of State Legislatures (NCSL). In this capacity she plans meetings and training programs for top legislative leaders in the states and U.S. territories.

Prior to her current position, Ms. Eckl served as director of State Services managing the conference’s core programs, which include fiscal affairs, legislative management, and leaders’ services. Prior to that, she was the long-time director of NCSL’s Fiscal Affairs Program. She has written extensively on state-budget and tax issues and regularly provides information on state-budget conditions and other fiscal matters to legislatures, trade associations, and members of the national print and television media. Ms. Eckl has been quoted in The Wall Street Journal, The New York Times, Financial Times, USA Today, and The Christian Science Monitor, among others, and has appeared on CBS, CNBC, FOX, ABC, CNN, and the BBC. She has been interviewed numerous times for National Public Radio.

Ms. Eckl serves as a consultant on NCSL’s evaluations of legislative organization and staff operations and is the NCSL liaison to the Hawaii Legislature. She also has represented the NCSL on assignments to Algeria, France, Germany, South Africa, Indonesia, Nigeria, and Saudi Arabia. An NCSL staff member since 1984, Ms. Eckl holds a Master’s Degree in Public Administration from the University of Colorado in Boulder.