State of the State Budgets

​​Joe CrosbyChairman and CEO
MultiState​Morgan ScarboroVice PresidentMultiState

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

The annual review of state revenues and budgets is always a lively and data-filled discussion —especially when reflecting on 2022, a year of “unprecedented spending and unprecedented revenue,” according to Joe Crosby of Multistate.

Unprecedented Spending

State budget growth spiked in 2022, tallying the highest growth rate in spending since 1979, according to the National Association of State Budget Officers (NASBO). Nationwide, general fund (GF) spending totaled $1.08 trillion, an 18.3% increase over FY 21, which wasn’t a “normal” year because states implemented mid-year budget cuts due to uncertainty around the pandemic. California’s 49% increase in spending in 2022 skewed the average; however, the median was an 11% increase. While inflation was a significant driver — increasing wages and project costs — the inflation-adjusted growth was still 9.6%. Many states fully funded their Rainy Day Funds in 2022 and sought to spend down budget surpluses.

Unprecedented Revenue Growth

Wage growth and a strong stock market increased revenues from sales taxes and individual income taxes. FY 22 revenues outperformed projections, totaling $1.17 trillion, a 14.5% increase over FY 21 (inflation adjusted = 5.8%). Actual collections exceeded revenue estimates by 20.5%, and 28 states reported revenue growth of more than 10% in FY 22.  Sales tax revenues were on average 8% above projections, and individual income tax revenue averaged 3.6% above estimates, with outliers such as Hawaii at 21.3% and Tennessee exceeding 100%.

Uncertainty Ahead

For FY 23, economic conditions are mixed and projections are less sanguine. Revenues-to-date vs. projections vary across the states, and those states that rely on a marginal income tax will likely see decreased revenues in 2023. Morgan Scarboro of Multistate predicted that states would see lower revenue collections in late 2023-2024.

Unprecedented Spending

State budget growth spiked in 2022, tallying the highest growth rate in spending since 1979, according to the National Association of State Budget Officers (NASBO). Nationwide, general fund (GF) spending totaled $1.08 trillion, an 18.3% increase over FY 21, which wasn’t a “normal” year because states implemented mid-year budget cuts due to uncertainty around the pandemic. California’s 49% increase in spending in 2022 skewed the average; however, the median was an 11% increase. While inflation was a significant driver — increasing wages and project costs — the inflation-adjusted growth was still 9.6%. Many states fully funded their Rainy Day Funds in 2022 and sought to spend down budget surpluses.

​“Lower revenue collections are anticipated for 2023-2024.”— Morgan Scarboro

​Revenue Collections vs. Projections: FY 2022

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Source: MultiState and NASBO Fall Fiscal Survey.

The July 1, 2023, fiscal projections suggest that states will still have a budget surplus. However, the inflation rate of 7.1%, stock market uncertainty, and labor troubles weaken the revenue outlook for 2023. While job openings are up, fewer job seekers are available, and it is estimated that there are 2.9 million “missing” workers; that is, able people of working age who have dropped out of the workforce. Meanwhile, household savings is at its second lowest point in 60 years at 2.3%. Although consumer spending is holding up, consumers have switched their spending from durable goods to services, which are not taxed as widely as goods. This will have implications for state sales tax revenues.

The MultiState presenters identified the following risks for 2023 and beyond:

• Ongoing inflation (despite interest rate increases by the Federal Reserve)

• A recession (with the key question being: How severe will it be?)

• Continued supply chain challenges

• Normalized federal aid levels

FY 24 may see the final easy budget cycle as federal funds dry up. NASBO projects that 80% of federal stimulus aid has been distributed. Additionally, many prognosticators expect an economic downturn or a recession in the next 12 months; therefore, states are likely to face a declining revenue picture.

​“Adjusting the interest rate is the only tool the Federal Reserve has to attempt to control inflation; the strategy is to reduce inflation by crushing demand. But this isn’t working.”— Joe Crosby

Discussion

Sen. Jonathan Dismang (AR)
With millions of missing workers and many jobs remaining unfilled, our state has seen the rate for unskilled labor increasing from $10 to $18 per hour in only six months. Inflation and wages keep going up. The Federal Reserve’s action doesn’t seem to be producing the results they anticipated.

Mike Kiely (UPS)
It seems contradictory that the Federal Reserve would push up interest rates at a time when there’s so much money in the system for the next 5 years from the massive federal stimulus.

Mr. Crosby
Current models do a poor job of predicting what is really happening in the economy. Adjusting the interest rate is the only tool the Federal Reserve has to attempt to control inflation; the strategy is to reduce inflation by crushing demand.  But this isn’t working. There are other levers that influence the economy that the Federal Reserve has no control over.

Sen. Matt Huffman (OH)
Why aren’t people working?

Mr. Crosby
The reasons people are not working are many, including poor health from long COVID, baby boomers deciding to retire early, social status issues among disaffected young people, enhanced government aid — although this is less significant as savings are being drawn down — mismatches of skills to changing job opportunities, and lack of career development pathways.

Sen. Paul Newton (NC)
What will be the impact on inflation and interest rates when $30 trillion of federal debt comes due?

Mr. Crosby
The U.S. Treasury has been able to keep debt payments in control. However, federal debt is currently at the highest percentage of the economy since World War II. And this will have impacts on state spending.

Toney Anaya (DoorDash)
The gig economy is changing how people work. Currently there are 6.8 million Dashers working, on average, 4 hours per week. In 2021, collectively they earned $18.7 billion. Workers have other alternatives. The challenge is how to provide benefits to gig workers without violating their “independent contractor” status and those regulations.

Mr. Crosby
This example illustrates the dynamic changes that are going on in the economy, which federal economic models and tools are not equipped to manage.

​The “gig economy” and challenges facing gig workers illustrate the dynamic changes that are going on in the economy, which federal economic models and tools are not equipped to manage. We need new tools.

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To learn more about our guest speakers’ organization, visit
MultiState.us

Presenters Biography

Joseph R. Crosby

CEO
MultiState

Joe serves as MultiState's CEO. 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.

Prior to joining MultiState in 2011, Joe was with the Council On State Taxation (COST) for more than a decade, ending his tenure there as COO & senior director, policy. Joe has also served as national director of state legislative services for Ernst & Young LLP; vice president with a state legislative tracking firm; and director of a grassroots canvass operation in California.

Joe is a nationally recognized expert on state and local business tax policy. He was identified by State Tax Notes as the “single most influential person in state taxation” and named as the publication’s inaugural Person of the Year. Joe is routinely quoted in trade and national publications on tax policy matters, has regularly testified before state legislatures, the U.S. Congress, and other state and national policy-making bodies, and has given hundreds of presentations to local, regional, and national business groups.

Joe is past president of the State Government Affairs Council, the premier national association for multistate government affairs executives, and he served on the board of the Washington Area State Relations Group. He earned his bachelor's degree in history from Loyola Marymount University in Los Angeles and completed graduate course work in economic policy at American University in Washington.

Morgan Scarboro

Vice President
MultiState

Morgan joined MultiState in 2018 and currently serves as Vice President. Morgan 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.

Morgan is a frequent panelist for state tax policy events and updates. She has presented to a wide range of groups, ranging from policy expert audiences at the Senate Presidents' Forum and National Conference of State Legislatures' State and Local Tax Task Force, general business communities at various state Chambers of Commerce, and government affairs professionals at groups like Washington Area State Relations Group, State Government Affairs Council, and Women in Government Relations. She enjoys the chance to present technical tax topics in an engaging, interesting way. Additionally, Morgan's work has been cited in national and state-based publications, including the Associated Press, CNN Money, Law 360, NPR, Politico, State Tax Notes, and The Washington Post.

Morgan seeks to be creative whenever she can, whether it's in developing client materials, creating coalitions, or engaging with the government relations community. She is a co-chair of the Women in Government Relations' State Relations Task Force.

Prior to MultiState, Morgan worked as a Policy Analyst at the Tax Foundation. She holds a bachelor’s degree in economics and a minor in political science from Georgia College & State University. Seeking to further her technical tax knowledge, Morgan also earned a certificate in State and Local Taxation from Georgetown Law in 2020.

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