State tax revenue has been lagging the past two fiscal years and a recent analysis by the Nelson A. Rockefeller Institute of Government shows by just how much. The report found that state tax revenue last year grew just 1.2 percent and 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 (at 1 percent growth each), according to authors Lucy Dadayan and Donald Boyd. Meanwhile, corporate income tax revenue declined by 6 percent and now represent just 5 percent of total state revenues. The numbers help explain why more than 20 states last fiscal year had to deal with some kind of budget shortfall.
But there may be a little relief around the corner. According to S&P Global Ratings, the climate may be right for “a revenue rebound” in fiscal 2018. A big reason, wrote 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 and the stock market “in a consolidation phase,” investors are more likely to cash out sooner. Petek said job growth and recent interest rate hikes will also benefit state income and sales tax growth in fiscal 2018.
The prediction is a spot of sunshine. But, it doesn’t mean state spending will noticeably increase nor that 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. In particular, Petek identified Connecticut, Kansas, New Mexico and Pennsylvania, as “are approaching fiscal 2018 under considerable fiscal pressure” and with what he believes are potentially rosy budget projections.
As some states grapple with lower state coffers, it may propel a new push for state level revenue-bonds as a means of diversification from General Obligation bonds. Connecticut is already pursuing this, with Treasurer Denise Nappier pushing legislation that would authorize her to issue income-tax dedicated bonds in place of GOs. States like New Mexico, Louisiana and Mississippi could also pursue revenue-based bonds strategy as well.