States Across U.S. Seen Reducing Taxes by the Most Since 2001

U.S. states are taking advantage of an expanding economy to cut taxes by the most in 14 years while spending more on education and other programs, according to the National Association of State Budget Officers.

States reduced taxes and fees this year by $2.3 billion, the deepest cut since fiscal 2001, according to a report released today by the group in Washington. Budgets are poised to grow by $22.7 billion, or 3.1 percent, to $752 billion in the current fiscal year.

“They’re on the right path,” Scott Pattison, the executive director of the group, said in a telephone interview. “The expectation is they will continue to see growth.”

Increases in consumer spending and business hiring as a national economic expansion accelerates is lifting state finances. The U.S. economy is poised to grow 2.2 percent this year, following increases at the same rate last year and 2.3 percent in 2012, according to the average estimate of 87 economists surveyed by Bloomberg.

All but seven of the 50 U.S. states expanded spending in the current fiscal year, which ends in July for most of the governments.

States reduced spending and raised taxes because of the 18-month recession that ended in 2009. By the close of the current year, spending will be 9.4 percent above the peaks reached before the full brunt of the recession, according to the report.

Market Gains

The improved outlook has driven demand for state debt in the $3.7 trillion bond market, leaving investors willing to accept lower yields, said Josh Gonze, a money manager at Thornburg Investment Management in Santa Fe, New Mexico, which oversees $10 billion in municipal debt. State bonds returned 6.4 percent this year through Dec. 5, according to Bank of America Merrill Lynch Indexes, compared with 9.2 percent for the broader muni market.

“States are in a good financial condition, and I don’t anticipate any problems in 2015,” said Gonze. “Most of the market has anticipated that, and the bonds are pretty expensive.”

The 3.1 percent rise in spending is still less than the 5.5 percent average increase from 1979 through 2014, according to the budget officers group, and not all programs are receiving an influx of funds. While states are in a “better” position than they were after the recession, the report said officials are still facing “difficult decisions.”

Big Spenders

“The trends are good,” Pattison said. “It’s just that the challenges are still pretty significant, given the spending pressures.”

The economy expanded at a 3.9 percent annual pace during the third quarter, following a 4.6 percent gain in the second quarter, according to Commerce Department figures. That was the biggest back-to-back advance since 2003. In November, employers added the most jobs in almost three years, the Labor Department said last week.

California, Colorado, Michigan and Wisconsin are among those that led the spending increase, according to the report. Others continue to cut back: In New Jersey, Illinois, and the energy-rich states of Alaska, Wyoming and South Dakota spending is set to decline this year.

Education and Medicaid, the state-run health-care program for the poor, accounted for a majority of the spending increases. Thirty-nine states boosted spending on elementary and high schools this year, while 40 bolstered funding for universities. More than two-thirds of the states spend more on Medicaid, which also gets federal funding.

November Elections

Other programs have been slower to benefit, including infrastructure. Just 12 states, including Florida and New York, increased spending for roads and transportation projects, according to the report.

States have also been using added money to cut taxes, which were increased after the recession as states sought to make up for lost revenue. Twenty-one reduced taxes and fees this year, led by Florida, Minnesota, New York and Texas, according to the report.

That trend toward cutting taxes may continue, said Pattison, following elections last month that strengthened Republicans’ majority in state legislatures and governors offices.

“You’re going to see a lot of discussion about revenue and taxes,” he said.

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