Thirty-One States Face Revenue Shortfalls for the 2017 Fiscal Year

State revenues have had a hard recovery, with about half of the states facing budget deficits or shortfalls, according to a recent report from the National Association of State Budget Officers. Based on a new data analysis, we anticipate that 31 states will face some kind of revenue imbalance in the upcoming legislative session.

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Some of the states on this list — such as Illinois, Connecticut, Louisiana, and Kansas — are in the midst of protracted, years-long debates about how to deal with their structural fiscal problems. Other states, like South Dakota, are in better shape and will be able to close their budgetary gaps without resorting to deep spending cuts or broad tax increases.

But the news isn’t entirely bad. Recent economic data suggest that California is no longer in deficit and Virginia’s deficit is significantly lower than we previously reported.

NORTHEAST

Connecticut
Connecticut is facing a budget deficit of between $1.3 billion and $1.5 billion over the next three years, according to reports from the governor’s Office of Policy and Management and the legislature’s nonpartisan Office of Fiscal Analysis. Budget experts say they have identified ways of bringing the state’s books into balance, but they will require significant cuts to state agencies. These experts have expressed hope that the situation could become easier after 2018, at which point they expect revenue and fixed expenditure growth to be better aligned.

Delaware
The Delaware Economic and Financial Advisory Council recently announced that, faced with mounting service costs and lower-than-expected corporate income tax receipts, Delaware is facing a $350 million budget deficit. Council members said that their state was currently at a crossroads and would need to enact fundamental changes to its fiscal structure, saying that the state should work to become less reliant on volatile sources of revenue. Governor-elect John Carney (D) and legislators have suggested that tax changes could be on the table in the coming legislative session, but further details are currently unavailable.

Maryland
In early November, Maryland Governor Larry Hogan (R) announced that his administration is eliminating over $100 million dollars worth of spending to try to rein in the state’s budget deficit. The administration argued that the deficit, which is estimated to range from $175 million to $225 million, was the result of the legislature failing to live within its means and take its fiscal responsibilities seriously. The biggest cuts will come from public works ($82 million), the University System of Maryland ($18.3 million), and Medicaid ($20 million), though the cuts to healthcare will be at least partially offset by money from the state’s tobacco settlement.

Massachusetts
In response to the October announcement that Massachusetts is facing a $295 million budget deficit, Governor Charlie Baker (R) announced in early December that he would use his unilateral authority to cut $98 million worth of spending from the state budget. The governor said that his cuts were broad-based and targeted at earmarked pet projects, while legislative leaders argued that the cuts would reduce needed services for homeless individuals and those struggling with addiction. Democratic leaders have signaled that they will move in January to restore at least some of this funding, similar to when they voted to restore millions in spending that Governor Baker had vetoed.

New York
New York’s revenues have consistently fallen below expectations during this fiscal year, resulting in the state Division of the Budget predicting a $689 million deficit for the coming fiscal year, a $2.1 billion deficit for the next year, and a $1.7 billion deficit in the year after that. The division’s report blamed the deficits on lost revenues from a forthcoming decrease in the personal income tax rate and multi-year income tax reductions for middle-class taxpayers.

Pennsylvania
Pennsylvania seems set for a repeat of last year’s protracted budget debate. Recent revenue reports suggest that the state faces a $600 million deficit for the current budget year and a $1.7 billion gap for the fiscal year that begins in July. The imbalance is already prompting lawmakers to reexamine many of the broad-based tax changes that they ultimately rejected last year, such as a new severance tax on natural gas and expansion of the sales tax base to include services. Governor Tom Wolf (D) has said he wants to fully explore possible spending cuts before pursuing major tax reform.

Rhode Island
Rhode Island is currently facing a $112 million budget shortfall, which is expected to rise in the coming years as the state’s expenses continue to rise. The deficit projection was higher but has fallen thanks to higher-than-expected revenues. The deficit may complicate Speaker Nicholas A. Mattiello’s (D) effort to phase out the municipal car tax.

Vermont
Governor-elect Phil Scott (R) campaigned on a pledge to hold down the state’s growing costs, but this promise will be put to the test as he seeks to close the state’s $40 million to $75 million budget shortfall. Scott has not yet offered a specific plan for how he will accomplish his goal, but has said that his aim is to ensure that budget growth does not outpace the state’s revenue projections, a unique task for Vermont since it is the only state in the country without a formal balanced budget requirement. Although the details are still being ironed out, Democratic lawmakers have begun to snipe at the governor-elect’s proposal, worrying that it will inhibit the kind of flexibility needed to address shifting economic conditions.

SOUTH

Alabama
Alabama economists have not formally predicted the size of the state’s budget hole, but Senator Saxby Chambliss (R), the chair of a newly chartered budget reform committee, announced that there will be a general fund shortfall in the coming year. While speculating about the deficit, Chambliss implied that the budget hole could range from $40 million to $100 million. He said he hopes that his committee will be able to find both short- and long-term solutions for the state’s budget problems. The committee is not considering tax increases currently.

Louisiana
Louisiana continues to face economic challenges. Flagging tax receipts this fiscal year and an unresolved deficit from FY16 have combined into a $600 million budget shortfall. Later this month, lawmakers are expected to announce how they plan to tackle the shortfall, but major cuts to the state’s higher education system seem inevitable. Looking ahead, Governor John Bel Edwards (D) has set his eye on resolving the state’s fiscal imbalances. His administration has not yet offered a formal plan, but Edwards called for a “genuine compromise” over “fair taxation.” Thus far, Republicans have been wary of further revenue increases, calling instead for a more balanced approach moving forward.

Mississippi
Mississippi’s revenue estimates rose slightly in November, but lawmakers are still planning to implement deep cuts to state spending when they craft the state’s upcoming budget. The state Joint Legislative Budget Committee has issued a fiscal recommendation that reduces overall spending by $195.3 million from the current budget year. Agencies most likely to see cuts include higher education, Medicaid, mental health services, and correctional facilities. After lawmakers presented the outline, Lieutenant Governor Tate Reeves (R) said he fully supports maintaining the slate of tax cuts that were enacted earlier this year.

Texas
Texas’ revenues forecast has been lackluster this fiscal year, with low sales tax receipts acting as a particular drag, prompting economists to predict that Texas will face a lean budget in the coming year. State economists have not yet released formal revenue projections, but current indications suggest that the state will face a budget shortfall in the coming year. In an effort to boost the state’s fiscal standing, the governor, lieutenant governor, and a host of legislators have called for tax cuts, with most focusing on simplifying or reducing the franchise tax and property tax.

Virginia
Although the state is still staring down deficits for the next two years, Virginia’s fiscal position has improved in the last few months such that Governor Terry McAuliffe (D) is no longer predicting the need for the same kind of sweeping tax hikes that seemed necessary this fall. Current fiscal estimates predict that the state has an $861 million deficit for the current fiscal year and $654 million gap in FY18. The Governor’s Advisory Council on Revenue Estimates describes itself as cautiously optimistic about the state’s turnaround and says that Virginia’s recovery is a sign of higher-than-expected job growth. In a recent press conference, McAuliffe outlined two policies that he plans to pursue to raise new revenue for the state: requiring remote sellers to collect sales tax and implementing a tax amnesty program in 2018.

West Virginia
West Virginia Cabinet Secretary of Revenue Robert Kiss recently announced that his state is facing a $165 million budget deficit in the current fiscal year and a deficit of over $400 million for FY18. The severity of his announcement is amplified by the fact that it came only weeks after Governor Tomblin (D) ordered state agencies to make 2 percent across-the-board cuts to help close an $87 million shortfall in the state revenue fund. Secretary Kiss now says that mere budget cuts will not be sufficient to setting West Virginia’s fiscal house in order and that significant budget reforms, such as adjustments to the School Aid Formula, will be necessary.

MIDWEST

Illinois
The budget impasse between Illinois Governor Bruce Rauner (R) and Speaker Michael Madigan (D) is still firmly in place, with no evidence of abating any time soon. In the aftermath of November’s elections, the governor tried to set up a new round of negotiations, including reducing his list of budget must-haves, but his efforts were stymied by the speaker’s initial refusal to attend at all. Although the two did meet eventually, it looks increasingly likely that no progress will be made before the gubernatorial elections in 2018. Further complicating matters, revenue officials have announced that corporate tax receipts have continued to dip, possibly presaging a recession-era budget.

Indiana
Although Indiana’s December revenue report shows that tax receipts will grow over the next two years, the state will still face a $378 million deficit in the current budget year. State economists attribute the deficit primarily to lower-than-expected sales tax revenues. Currently, lawmakers are not overly concerned about covering the gap because they can tap the state’s Medicaid surplus and realize savings from lower-than-expected K-12 enrollment.

Iowa
The Iowa Legislative Services Agency recently announced that the state is facing a $132 million budget gap for the current fiscal year. The announcement came a few days after Governor Terry Branstad (R) announced that his office was anticipating the need to cut $100 million from the state budget. The governor did not provide any specifics about what those cuts could entail, saying that the governor’s office will present a more formal plan in January. In response to the state’s financial difficulties, legislators have said they will seek pro-growth policies that will put the state on the path of fiscal stability.

Kansas
Kansas has consistently missed its revenue estimates this fiscal year and is currently facing an estimated $349 million budget deficit, a situation that Governor Sam Brownback (R) said would be made significantly worse if the state loses a major school financing case. Although the governor has not yet released a plan to address the state’s shortfall, he has indicated that he favors cutting state spending, allocating tobacco settlement money to the General Fund, or changing pension payments instead of looking for new revenues, but he is not ruling anything out. In the legislature, more elected leaders from both sides of the aisle have begun to call for a reduction or repeal of the governor’s signature 2013 tax cuts.

Missouri
Lagging corporate tax revenues this year and a higher-than-expected number of tax refunds last year have resulted in Missouri facing an estimated budget deficit of between $200 million and $300 million. Lawmakers had hoped that Governor Jay Nixon’s (D) $150 million budget cuts earlier in the year would have been sufficient to address the problem, but it now appears that more will have to be done. Although the administration has not yet laid out a full plan for resolving the gap, earlier this month he announced that he will block $51 million of budgeted spending, mostly from Medicaid. Democratic lawmakers have blamed much of the shortfall on the state’s phase-out of the corporate franchise tax, but with a Republican governor-elect and solid GOP control in both legislative chambers, there is little reason to believe that their complaints will amount to a policy reversal.

Wisconsin
Wisconsin will face significant fiscal difficulties as it crafts its upcoming budget. Economic reports indicate that the state is facing a $693 million shortfall for the current fiscal year, a $1 billion gap in the state transportation budget, and a predicted $900 million deficit by the end of the next biennium. With the legislative session fast approaching, lawmakers have begun offering ideas for how to restore fiscal stability. Some have called for increases to the state gas tax and car registration fees, but Governor Scott Walker (R) said that he will not approve those new revenues unless legislators reduce taxes by an equal amount somewhere else.

WEST

Alaska
Governor Bill Walker (I) has released a $4.2 billion budget plan that he hopes will set his state on the path of fiscal stability and close the state’s multi-billion dollar budget shortfall. Major portions of the governor’s plan include increasing the gas tax by 16 cents over two years, reducing general fund spending by 3 percent, and canceling a major road construction project outside of Juneau. Even with these changes, however, the proposal is still $900 million out of balance and would require the legislature to make significant changes to the state’s Permanent Fund. Although the governor tried and failed to enact reforms to the oil dividend last year, reports indicate that the legislature may be more amenable to his proposals this year.

Colorado
Governor John Hickenlooper (D) has unveiled a $28.5 billion budget plan that seeks to cut spending on education, hospitals, and infrastructure in order to close the state’s $119 million budget shortfall. However, this newly announced revenue figure is significantly lower than the projected $330 million hole that state economists announced in November. Despite the uptick in revenue, lawmakers acknowledge that they face hard choices as they try to find ways to fund the state’s transportation, education, and healthcare needs.

Montana
Although recent economic forecasts predict that Montana’s economy will grow over the next two years, lawmakers believe they will need to contend with an unspecified budget deficit in the near term. Consequently, Republican leaders have panned Governor Steve Bullock’s (D) proposed budget that seeks to increase overall state spending, with education getting a particular bump, and to hike income taxes for wealthy residents, medical marijuana, alcohol, and tobacco.

Nebraska
Nebraska’s economic situation has continued to tumble in recent months. One forecast pegged the state’s deficit at $910 million in October, only to have it increased to $1.2 billion by mid-November. No specific plans have yet emerged for how to fill in the gap, but lawmakers have strongly implied that they will rely the state’s $630 million cash reserve. Currently, there are no indications that tax increases will be a part of the budget conversation in the new legislative session. To the contrary, Governor Pete Ricketts (R) has reiterated his commitment to cutting income and property taxes during the coming legislative session.

New Mexico
Despite their efforts from earlier in the year, New Mexico lawmakers will continue to face a fiscal imbalance in 2017. In October, lawmakers convened a special session and proposed a number of spending and tax changes (including implementing mandatory combined reporting, taxing remote sales, and delaying a series of scheduled tax cuts) that aimed to ease the state’s $458 million deficit. In the end, the legislature adjourned, having abandoned all of the tax policy changes in favor of cuts to state spending. Lawmakers hoped that they had solved their budget problem, at least in the short term, but new estimates in December show that the state is still $69 million in the red for the current fiscal year and that revenues for the upcoming fiscal year are down by $300 million. If Governor Susanna Martinez (R) sticks to her opposition to any new revenue-raisers, state agencies should prepare for another round of belt-tightening.

North Dakota
While lawmakers’ special session effort to plug their state’s $310 million budget gap appears to be
holding, legislators’ expectations for the coming year assume a grim outlook. Legislative leaders say they are wary of the optimistic economic predictions implicit in Governor Jack Dalrymple’s (R) budget, and they are expecting revenues to continue to slip due to the energy sector’s continued weakness.

Oklahoma
Oklahoma will face a daunting budget hole again this year. Lawmakers struggled to close a $1.3 billion budget shortfall last year, and recent estimates now indicate that the state will face an $868 million deficit this year. State economists have said that this year’s problem has been exacerbated by the state’s use of one-time money to fill previous budget gaps, leading them to call on lawmakers to engage in substantive budget reforms in the coming year. Taking up this call, Governor Mary Fallin (R) is renewing her push for a higher tax on tobacco products and an expanded sales tax, policies that lawmakers rejected during the 2016 session. Although some Republicans seem to believe that all options need to be on the table moving forward, their more conservative counterparts insist that the problem still comes down to the state spending too much money.

Oregon
Faced with a $1.7 billion budget shortfall and the failure of Measure 97‘s historic tax increase, Oregon lawmakers are scrambling to find a combination of new revenues and spending cuts that can stabilize the state’s fiscal crisis. Governor Kate Brown (D) has presented her plan, which calls for $897 million worth of tax increases (notably, it would cut corporate tax expenditures and hike tax rates for tobacco and alcohol) paired with $800 million in cuts. The governor has called on the business community to work with her to help find a compromise solution.

South Dakota
Declining sales tax revenues and a weaker-than-expected agricultural sector has produced a budget shortfall of indeterminate size in South Dakota, but Governor Dennis Daugaard (R) is confident that both responsible budgeting and using state reserves will resolve the issue. Although lawmakers have talked about the need to tax internet sales, there are no other tax changes in the governor’s proposed budget.

Washington
Policymakers in Washington have been dogged by a persistent gap in the state education budget since the state supreme court ruled that the current funding method does not pass constitutional muster in 2012. Now Governor Jay Inslee (D) is proposing that the state enact $4 billion in tax increases in order to cover this deficit. Key portions of his plan include calls to tax carbon emissions, increase the business and occupation tax rate to 2.5 percent, and levy a 7.9 percent tax on capital gains above a certain threshold. The governor will encounter strong resistance to his proposals from the Republican-controlled senate, where lawmakers have already called the governor’s proposal counterproductive to the state’s economic growth.

Wyoming
Although Governor Matt Mead (R) was forced to cut $248 million from state agencies this year, Wyoming’s short-term fiscal problems remain, with state forecasters attributing the gap to sagging revenues in the energy and mining sectors. The state is facing an estimated $156 million deficit for the coming fiscal year. To close it, the governor has said he hopes to utilize the state’s $1.6 billion rainy-day fund instead of enacting further spending cuts, saying that new cuts would lead to layoffs and service reductions.

 

Ryan Maness, Senior Policy Analyst & Tax Counsel

Ryan Maness, Senior Policy Analyst & Tax Counsel

Ryan Maness joined MultiState in 2012 and now serves as a Senior Policy Analyst and Tax Counsel. His prior experience includes serving as policy analyst for the Colorado House of Representatives, contract attorney for the Colorado Conflict Defender's Office and intern for the Democratic Congressional Campaign Committee. Ryan graduated with a Juris Doctor in 2009 from the Syracuse University College of Law. He also holds a Bachelor of Arts degree in philosophy and political science from the University of Illinois at Urbana-Champaign, which was obtained in 2006. Email Ryan at rmaness@multistate.com.
Ryan Maness, Senior Policy Analyst & Tax Counsel