A Revenue Pick-Me-Up?
For the past two fiscal years, tax revenue has lagged. A new analysis, though, predicts states may soon see some relief.A report this week by S&P Global Ratings says the climate may be right for “a revenue rebound” in fiscal 2018. A big reason, writes analyst Gabe Petek, is that investors may have held out in 2016 on cashing out stocks because they hoped a Trump presidency would give them a more favorable tax climate for their capital gains. With tax reform now looking like it’ll take longer, investors are more likely to cash out sooner. Petek says job growth and recent interest rate hikes will also benefit state income and sales tax growth in fiscal 2018.
That's good news given that a new analysis by the Nelson A. Rockefeller Institute of Government found that state tax revenue last year grew just 1.2 percent and actually declined by one-tenth of a percent after adjusting for inflation. It’s the weakest performance since 2010 and a major drop from 4.7 percent growth in fiscal 2015.
The main culprits were weak sales and income tax revenues, according to authors Lucy Dadayan and Don Boyd. Meanwhile, corporate income tax revenue declined and now represents just 5 percent of state revenues.
The Takeaway: With nearly half the states grappling with budget shortfalls, the prediction for 2018 is a spot of sunshine. Still, it doesn’t mean state spending will noticeably increase nor does it mean the financial pressure is off.
A steadier 2018 simply means some states might not struggle next year as much as they have been. As always, there are outliers. Consider Connecticut, Kansas, New Mexico and Pennsylvania, which Petek says “are approaching fiscal 2018 under considerable fiscal pressure.”
Meanwhile, uncertainty at the federal level regarding potential tax and budget cuts “will only exacerbate” things, warns Dadayan and Boyd.
Ending 2016 With a Bang
Every state registered economic growth during the final three months of 2016, according to new data released Thursday by the Bureau of Economic Analysis.Real GDP growth by state ranged from 3.4 percent in Texas to 0.1 percent in Kansas and Mississippi. Of note, mining grew 5.2 percent after six straight quarters of decline, which helped states like North Dakota and Oklahoma jump into the positive for the first quarter in more than a year.
Overall, GDP in 2016 increased in 43 states and the District of Columbia. Nationwide, growth was 1.5 percent. The fastest-growing states were Washington, Oregon, and Utah, respectively, which grew 3.7 percent, 3.3 percent, and 3 percent. Growth in Washington and Utah was driven by information services, while the largest contributor to growth in Oregon was the manufacturing of durable goods.
Mining was the main culprit in states with the largest declines. Other than Texas, oil states were the worst-performing economies in 2016. North Dakota and Alaska fared the worst, with GDP declining 6.5 percent and 5.0 percent, respectively.
The Takeaway: Texas shows why economic diversity is so important. While oil and natural gas states got a slight economic break at the end of the year, their economies are still struggling. But in Texas, the pain has not been nearly as severe. It was the fastest-growing state during the fourth quarter thanks to big gains in its real estate economy. It was also the only oil state to post any economic growth for the year. Texas, which ranked 40th in GDP for 2016, also finished ahead of Delaware, Kansas and Montana.
Still Debt-Shy
The amount of debt states are carrying remained relatively flat for the fourth consecutive year, according to a new Moody’s Investors Service analysis. Tax-supported bond debt increased in 2016 just slightly -- by 0.8 percent -- to total $517 billion. (Tax-supported debt includes most types of bond debt paid back from state tax collections, but does not include self-sustaining bonds that are paid back from revenue generated by the project they finance.)The outstanding median debt per capita fell by about $20 to $1,006 per person. That shift reflects the fact that population growth exceeded debt growth in some states, Moody’s said.
The states with by far the highest debt per capita are Connecticut ($6,505) and Massachusetts ($5,983). A notable exception to the flat trend was Alabama, which increased its outstanding debt by 21 percent partially due to a large issuance of highway revenue bonds and another large sale of bonds secured by BP settlement revenues.
The Takeaway: If you’ve read the first two items in this piece, then this trend makes sense: States are simply unwilling to increase their debt load in this climate of fiscal uncertainty. Moody’s found that states are shifting toward paying for more capital projects with cash-on-hand (also called pay-go) as a way of avoiding new debt. The agency expects the trend to continue over the next year thanks to “continued modest revenue increases, higher interest rates, and uncertainty over federal fiscal policy and Medicaid funding.”
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