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States Cut Taxes, Increase Spending as Economy Improves

U.S. states are cutting taxes and increasing spending as the improving economy lifts their revenue, marking a recovery from the financial strains that persisted after the recession.

Spending by state governments is set to climb 3.8 percent to $722 billion during the current budget year, the fourth straight annual increase, according to a report released today by the National Association of State Budget Officers. With more money on hand, 23 states cut taxes or took other steps that reduced revenue, and 42 boosted funding for schools.

“State fiscal conditions are modestly improving,” the Washington-based budget officers group said in the report. “Signs of fiscal distress continue to subside, and most states expect revenue and spending growth in fiscal 2014.”

The financial gains are lifting a drag on the economy after the 18-month recession that ended in 2009, during which states eliminated jobs and cut spending to make up for declining revenue. In the six months through September, U.S. economic growth advanced partly because of increases in state and local government spending, according to the Commerce Department.

This year, 16 states faced shortfalls totaling $6.4 billion. That’s down from $37 billion a year earlier, according to the budget officers’ report. For the next fiscal year, ten states are forecasting shortfalls, amounting to $4.4 billion. The fiscal year ends in June for all but four states.

Jobs Drop

When adjusted for inflation, total state spending has yet to rebound above the peak hit in 2008.

The number of full-time jobs is expected to drop by about 2 percent this budget year compared to last, according to the report.

“They’re reluctant to bring in full-time staff,” Scott Pattison, the executive director of the budget officers group, said on a conference call with reporters. “I don’t think you’re going to see any significant increase in state employment in the foreseeable future.”

Revenue growth is also forecast to slow to 0.8 percent this year from 5.7 percent a year earlier, when states received a boost after residents sold investments in anticipation of federal tax law changes, Pattison said. This year, revenue may outstrip forecasts because of the rise in stock prices.

Reducing Taxes

States used added revenue to reduce taxes and fees by about $2.1 billion this year, led by Ohio, Arizona, Texas, Alaska and Pennsylvania, which adopted the biggest decreases.

States also increased spending in areas cut because of the recession, including higher education, transportation and the Medicaid health-insurance program for the poor, according to the report.

Governors are preparing next year’s spending plans. New York Governor Andrew Cuomo, a Democrat, appointed a commission to consider tax cuts, which are also being sought by Republican governors in New Jersey and Florida.

In Minnesota, finance officials are predicting that the state will have a $1 billion surplus next year, allowing it to send more money to schools. California, which in 2009 was forced to issue IOUs to pay its bills, is projected to end this year with a $2 billion surplus.

State gains have also aided investors in the $3.7 trillion municipal bond market, where prices have fallen this year because of speculation about rising interest rates. State debt has delivered a negative return of 1.34 percent this year, about one-third of the loss for local bonds, as cities haven’t recovered as quickly, according to Bank of America Merrill Lynch data.

The size of the municipal bond market has shrunk, as governments remain hesitant to borrow money, despite their improving finances. The Federal Reserve yesterday reported that state and local government debt dropped by $35 billion to $3.69 trillion during the third quarter.

With interest rates rising, Pattison said he doesn’t expect to governments to step up borrowing.

To contact the reporter on this story: William Selway in Washington at wselway@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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