Facing Weak Revenues, States' Spending Growth Slows

A new NASBO report cites a volatile stock market and modest national economic growth for the slowdown.
by | November 17, 2016
A trader working on the floor of the New York Stock Exchange. (AP/Richard Drew)

Declining tax revenues has driven a slowdown in state spending, according to a new report from the National Association of State Budget Officers (NASBO).

In fiscal 2016, state spending grew by an estimated 4 percent. That growth rate is significantly slower than the relatively sharp increase of 6.9 percent in fiscal 2015, which also marked a 10-year high in spending growth.

Spending from the general fund grew 3.1 percent from fiscal 2015, which is significantly lower than increases in prior years and is a full percentage point lower than NASBO predicted for 2016 spending. The shrinkage was largely driven by declines in personal income and sales tax revenue growth.

In total, general fund revenues increased just 1.8 percent in 2016, compared with 4.8 percent the year before. Corporate income taxes -- a smaller portion of states’ general revenues -- saw a significant decline of 5.8 percent.

The report cited a volatile stock market and modest national economic growth as big reasons for the revenue slowdown. Most states this April received less income tax collections than expected for the month, “partly due to the weaker stock market performance in calendar year 2015,” the report said. Low oil and natural gas prices in energy-producing states also played a role in driving down the numbers.

Regionally, spending growth was highest in the Southeast and Southwest, which both increased overall spending by nearly 6 percent in 2016. Brian Sigritz, director of NASBO’s State Fiscal Studies, noted that both regions have seen relatively strong population growth, which can lead to both increased spending demands and increased tax collections. Specifically, both regions increased transportation spending and made investments in capital spending, he said.

The Great Lakes region was the only area that saw a spending decrease (of 0.8 percent), mainly due to Illinois ending the fiscal year without a budget in place, the report said.

The bulk of state spending was on Medicaid and K-12 education, although Medicaid since the recession has surpassed education in taking up the largest share of dollars. Elementary and secondary education has gone from representing 22 percent of total state spending in fiscal 2008 to an estimated 19.4 in fiscal 2016. Medicaid has shot up from a little more than 20 percent to 29 percent last year, largely thanks to increased federal dollars going to states to expand Medicaid under the Affordable Care Act. (When it comes to how states spend their own revenue dollars, education is still the top line item.)

Transportation spending, which depends mostly on states’ own revenue sources, has seen major gains as of late. When looking at only spending from states’ own funds, transportation spending increased 8.8 percent in fiscal 2015 and 6.7 percent in fiscal 2016. The increases come as many states have approved gas tax increases in response to the pent-up demand for infrastructure projects and maintenance.

Looking ahead, NASBO expects the pace of growth in federal funds to states will likely decline as Medicaid enrollment growth slows in future years. Since 2014, Medicaid expansion in states that choose to do so has been fully funded by the federal government. But beginning in 2017, federal dollars for expansion will ramp down, leveling off at 90 percent by 2020.

State budget officers have said that as their share of Medicaid dollars will increase, they are looking for ways -- such as implementing managed-care models or focusing on health-care outcomes rather than just services -- to mitigate their costs.