Happy Fiscal New Year!
For most states, June 30, marks the end of the current fiscal year. For those states, budget leaders have been hammering out details in state capitals over the past few months and those will start to take effect. At the end of the day, passing the budget is the one item lawmakers are constitutionally required to pass during a session. In general, fiscal conditions this year represent a return to normal following the boom years after the COVID-19 pandemic. In 2021, and 2022, states saw double digit revenue growth. This enabled some to binge on spending priorities, while many others funded long term tax cuts to increase their economic competitiveness. But since 2023, revenues have been more or less flat. It’s years like these that lawmakers really show their true priorities. Will they increase taxes to pay for ever expanding government services? Or will they judiciously improve efficiency and focus on core functions of government to improve their state’s fiscal health?
California has been hit harder than nearly any other state in the last year. In 2023, the state had reported $100 billion in surplus funds. Their spending sharply increased during the pandemic and after, due to the free-flowing federal aid and strong tax collections. But earlier this year, state leaders realized the dangers of going on a spending spree when the times are good. Revenues from the volatile personal income tax and other volatile taxes have come up short. And to make matters worse, an auditor uncovered that the state had really understated its liabilities in 2022 by about $29 billion.
Talk about a big rounding error.
For months Governor Gavin Newsom and the state legislature had been unable to even agree on just how dire the situation really was. The governor estimated that the deficit was about $38 billion, while the Independent State Legislative Analyst Office projected a much more severe $73 billion.
This week, legislators came together to a budget agreement that will see the state reduce spending, defer payments and draw down on its budget stabilization fund. That agreement also delayed a planned minimum wage increase for health care workers. Recognizing that minimum wages increase costs for consumers. The state expected that the $25 an hour minimum wage would increase the price of providing health care for state workers by at least $4 billion as well.
In Maryland, overall spending remains about the same as last year, but residents will find themselves paying new taxes to fund education and transportation projects. As electric vehicles become more common in many places, many states are reevaluating their traditional reliance on gas taxes to fund transportation. In Maryland leaders sought to deal with the shift this year by increasing registration fees and adding surcharges for plug in hybrid and electric vehicles.
Lawmakers in Illinois are taking a similar approach, increasing taxes yet again to patch holes in the state budget despite a shrinking tax base. Since 2019, the state has lost more than 470,000 residents on net to domestic out-migration to the other 49 states. Taxpayers are moving elsewhere for economic opportunity. How is the state responding to this trend? They are increasing taxes and spending for those who remain. The budget, recently signed by Governor JB Pritzker, includes a $1.2 billion tax increase. The state is reducing the net operating losses that businesses can deduct on their taxes, adding a sales tax on leasing property and imposing a graduated tax on sports betting.
While Illinois attempts to increase spending, despite its shrinking population, one of America’s fastest growing states found a way to save taxpayers money, spending less than it did last year. And that is the Free State of Florida under Governor Ron DeSantis, who recently signed a budget that includes a $500 million reduction in spending compared to last year. That’s right, you heard that correctly. That’s an actual substantial cut to government spending in Florida. This year, Florida’s budget also puts $1.5 billion towards tax relief and uses $6.3 billion to pay down outstanding debt, bringing the state’s overall debt level to a 25-year low.
As the boom years for state budgets post pandemic fade away, the states committed to fiscal responsibility will find themselves in a much stronger position. They will have an easier time balancing budgets, cutting taxes, paying down debt and putting money away for a rainy day. Meanwhile, the states spending money as quickly as it comes in and ignoring the effects of high taxes on economic competitiveness, will see more pronounced boom and bust cycles in the years ahead. For more information on all of these great stories across the states, you can visit www.alec.org
For American Radio Journal, I’m Jonathan Williams.
Jonathan Williams is the executive vice president of policy and chief economist at the American Legislative Exchange Council. Follow him on X at @TaxEconomist.
