Economic Development

Coming Up for Air

Strong revenues spell less stress for states and localities, but budget relief may be short lived.
by | March 2006

Going into the 2007 budget season, state and local officials are upbeat. State revenues are growing at a healthy clip--and have been for a few years in a row. Corporate income taxes are flowing into state coffers at a growth rate above 20 percent. Meanwhile, individual income taxes are growing at a robust 10 percent. "This is even stronger than we were in 1999 or 2000," says Harley Duncan, executive director of the Federation of Tax Administrators. "People thought it could never be better than that."

Local revenues are growing nicely, too. According to the National League of Cities' annual fiscal survey, local property taxes, helped by hot real estate markets, grew by 6 percent last year. Local sales taxes were also up by 5 percent. "For the first time since 2001," the NLC reports, "a majority of city finance officers reported improving fiscal conditions compared with the previous year."

The good news, coupled with the looming elections this November, has many politicians feeling generous. Illinois Governor Rod Blagojevich proposes spending $3.2 billion on highway, bridge and school construction. Alabama Governor Bob Riley and Georgia Governor Sonny Perdue have each proposed spending roughly $1 billion more on education, including substantial sums for school construction. And in Arizona, Governor Janet Napolitano wants to spend $100 million on policing the border with Mexico.

Around two dozen states are eyeing tax cuts. New York Governor George Pataki, who is looking at a run for the White House, proposed $3 billion worth of tax cuts, including big cuts in business and estate taxes and a property tax rebate. In Florida, Governor Jeb Bush, who is also in his last year in office, wants $1.5 billion in tax cuts. His plan includes a property tax cut, sales tax holidays and cuts aimed at spurring business investment.

But there are fiscal clouds on the horizon, and they are due to structural budget problems. Medicaid remains a large and fast-growing budget item in nearly every state. Many state and local governments also face shortfalls in their pension systems that may eat up budget surpluses. "We've got some short-run optimism," says Ray Scheppach, executive director of the National Governors Association. "But it doesn't change the long-run problem of a continuing and pretty serious structural imbalance."

Perhaps the biggest of those problems is one that state and local governments are only starting to grasp. That has to do with the cost of providing health care for retired government employees. Starting in fiscal 2008, the Governmental Accounting Standards Board is requiring governments to quantify the health care promises they've made to retirees for the next 30 years. They need to put that number on their books--and say how they'll pay for it. When Maryland calculated its tab last fall, it came to $20 billion. Maryland officials figure they may have to set aside $1.6 billion a year to pay off that bill.

"Revenues are strong, but state budgets still face pretty significant expenditure pressure," says Scott Pattison, executive director of the National Association of State Budget Officers. "We don't want to get too euphoric about the situation."

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