Low Tax Revenue Fuels State Deficits, Budget Battles

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By Che Odom

Ten states this year either extended their legislative sessions or called new sessions due to budget standoffs, with some like Illinois’ extending more than two years.

This growing brinkmanship over state budgets may be rooted in the same factors causing state revenue to suffer even as the country’s economy grows. In particular, tax cuts and lower than expected tax collections, along with lagging oil prices, have contributed to increased deficits and fuel fights among legislatures.

State lawmakers fight yearly battles over how to pay for education and needed improvements in infrastructure, and this year they’ve kept an eye on looming congressional tax and budget plans. Even state legislatures dominated by one political party, like Congress, bicker over how best to fund government.

“Republicans control both chambers of Wisconsin’s Legislature and the governor’s office, yet, just like their federal counterparts, they can’t seem to get it together,” state Sen. Lena Taylor (D) told Bloomberg BNA.

Connecticut, Rhode Island, and Wisconsin don’t have approved budgets in place weeks after the July 1 start of their fiscal years. Rhode Island and Wisconsin have statutory continued budget authority in place until a new budget is enacted, while Connecticut is operating under the authority of a gubernatorial executive order.

The longer Connecticut goes without a budget, the greater the strain facing cities and towns, which will need to revisit their spending to adjust for cuts in state aid, Connecticut Conference of Municipalities Executive Director Joe DeLong told Bloomberg BNA.

This is creating “an unprecedented local-budget situation among municipal leaders—who pride themselves on responsible fiscal management and balanced local budgets year in and year out,” DeLong said.

Lengthy Budget Negotiations

Lawmakers in New York, New Jersey, Massachusetts, Illinois, and seven other states didn’t pass spending plans by the beginning of their budget years.

In more than a dozen other states, legislators fought down to the wire. Maine and New Jersey were forced into brief government shutdowns. Much press was given to New Jersey Gov. Chris Christie’s (R) time at the beach over the July 4th weekend when some stretches of state coastline were closed to beach-goers.

“In some states, it seems like this is the approach they take,” Meg Wiele, deputy director of the Institute on Taxation and Economic Policy, told Bloomberg BNA. Some legislatures just don’t settle on a budget until the end of a legislative session, such as for those bodies that don’t meet year-round, she said.

What isn’t typical is “the degree of crisis that we’re seeing in terms of not being able to make the budget balance,” said Elizabeth McNicol, senior fellow at the Center on Budget and Policy Priorities, adding that this kind of stress in budget negotiations is more common during a downturn.

Time of Growth

But the country isn’t in a downturn. U.S. gross domestic product growth will rise 2.2 percent in 2017, which is slightly better than 2.1 percent growth last year but slower than 2015’s rate of 2.6 percent. The increase will drop to 2.1 percent in 2018 and 1.9 percent in 2019, according to the most recent forecast released at the Federal Open Market Committee meeting June 14.

“During times of economic growth, states can be reasonably confident that the tax collections upon which they base their budgets will come in as predicted,” McNicol said in a March report she co-authored with research associate Samantha Waxman. “This year is different.”

This year, 30 states saw revenue come in below what they budgeted to collect, the largest number since 2010, according to the National Association of State Budget Officers. In 2016, 25 states had such budget gaps. In 2015, that figure was only seven.

At least 23 states made net mid-year budget cuts in 2017 totaling $4.9 billion.

‘Ill-Advised’ Choices

“State policymakers’ own ill-advised tax policy choices” may account for some of the shortfall, according to McNicol.

In Wisconsin, the budget battle is focused largely on funding mechanisms for transportation and infrastructure programs. Senate Republicans last week proposed cutting three taxes opposed by the business committee—the personal property tax, alternative minimum tax, and “forestry mill tax.”

Senate Majority Leader Scott Fitzgerald (R) said in a July 18 letter to Assembly Speaker Robin Vos (R) that the cuts should ease intra-party budget feuding. Democrats expressed frustration over the plan, arguing infrastructure projects and school funding are in jeopardy if the impasse continues.

Lagging Revenue

Lower-than-anticipated state income tax receipts is the chief reason for Connecticut’s deficit, according to state Revenue Commissioner Kevin Sullivan.

Despite having a per capita personal income that is more than 143 percent of the national average—according to Moody’s— the state’s economy continues to lag behind others.

Outstanding debt levels and unfunded pension liabilities relative to revenue are among the highest of any state in the country, Moody’s Investors Service said in May. Also, Connecticut hasn’t recovered many of the jobs it lost during the financial crisis.

Untaxed Digital Sales

Though the national economy recovers, sales tax collections are below their historical average as consumers have remained cautious long after the end of the recession. Untaxed internet sales have also continued to grow, according to the report by McNicol and Waxman.

States are constrained in their taxing authority over remote retailers by the U.S. Supreme Court’s 1992 decision in Quill Corp. v. North Dakota,which prohibits states from imposing sales and use tax collection obligations on vendors that don’t have a physical presence in-state.

Connecticut, along with a number of other states, is attempting to collect more from e-retailers. The state Department of Revenue Services sent 233 demand letters in June ordering remote sellers to either voluntarily begin collecting sales and use taxes or to submit in-state sales data for three years.

Connecticut is attempting to recover an estimated $75 million to $100 million in tax revenue annually that isn’t being remitted to the state by out-of-state online businesses selling into Connecticut, Sullivan told Bloomberg BNA.

The Rhode Island Senate also hoped to collect from remote retailers. Senators attached an amendment to the House-approved budget requiring remote online retailers to collect and remit the state’s 7 percent sales tax. The House wouldn’t agree, so the Legislature has not yet approved a budget.

House Speaker Nicholas Mattiello (D) called the amendment “inappropriate” and said the House would recess without the Legislature approving a spending plan.

To contact the reporter on this story: Che Odom in Washington at COdom@bna.com

To contact the editor responsible for this story: Jennifer McLoughlin at jmcloughlin@bna.com

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