Amid Economic Uncertainty, State Tax Revenues Decline

You're reading Route Fifty's State and Local Roundup. To get the week’s news to use from around the country, you can subscribe here to get this update in your inbox every Friday.

It’s Friday, May 12, and we’d like to welcome you to the weekly State and Local Roundup. There’s plenty to keep tabs on, with book bans in Indiana, high lead levels in the drinking water of Illinois public schools and the signing of an “enormous package” of green bills in Colorado. But first we’ll start with state budgets.

We’re starting to get a sense of how state revenues fared at the height of income tax collections in April, and the good times, it seems, are coming to an end. 

Fitch Ratings issued a report on state tax revenues from April. After two years of sometimes record-breaking surpluses, the bond rating agency found, revenues are coming in well below the prior year, “and in some cases below state projections.”

Income tax revenues are sliding, while sales tax revenue growth remains strong. The report cited several states including Georgia, Illinois and Massachusetts. 

On Tuesday, Georgia reported that net tax collections for April totaled $4.2 billion for a decrease of 16.5%, compared to April 2022. 

In Massachusetts, the declines have been worse than forecasted. Projections fell more than $1.6 billion short of what officials originally expected for the month. “Through February, [year to date] collections were about $1 billion above the state's original forecast,” the Fitch report said. “However, following a 31% [year over year] decline in total tax revenue in April, YTD collections are now more than $700 million below initial projections.”

And in Illinois, April tax receipts from state sources dropped 21.5%—more than $1.8 billion—compared to last April. The main contributor to the falloff was the personal income tax, which accounted for nearly all of last month’s decline.

“The substantial declines in April erased nearly all of the growth accrued throughout the fiscal year,” the Commission on Government Forecasting and Accountability, which provides estimates for the state’s legislature, reported. “General funds receipts in FY 2023 are now only $132 million above last year’s pace.”

State revenue growth, when adjusted for inflation, has started to stall, according to the Urban Institute. Data compiled by Lucy Dadayan, a principal research associate with the institute’s Tax Policy Center, show that inflation-adjusted state tax revenues declined during the first nine months of fiscal 2023 (July 2022 through March 2023) compared with the corresponding time period the year before. 

Almost all the states with income taxes that have reported April receipts—including Alabama, Arkansas, Idaho, Iowa, Kansas, Missouri and Montana—have seen revenue declines. West Virginia is the only exception, reporting a 4% year over year increase in total April general fund revenues.

Similarly, the Congressional Budget Office also reported last week that federal receipts from income tax payments processed in April were less than anticipated. “Because tax receipts through April have been less than the Congressional Budget Office anticipated in February, we now estimate that there is a significantly greater risk that the Treasury will run out of funds in early June,” the report said.

If there’s good news with the new numbers, though, it might be that most states were already planning for softer revenue growth or slight declines for fiscal 2024, after double-digit percentage increases for two consecutive years, according to the National Association of State Budget Officers.  

“These last few years have been very unique—it’s unprecedented to see double-digit revenue growth for two straight years,” Brian Sigritz, director of state fiscal studies for NASBO, told Route Fifty last month. “Some of that was economic strength, and some of it was due to the federal funding flowing to states and households. States weren’t assuming that level of growth would continue.”

Fitch added, “As states set their budgets for fiscal 2024, most are using cautious revenue forecasts that are generally in line with Fitch's expectation for a mild recession later in 2023.”

Another reason for optimism: Rainy day fund balances have reached new heights since the start of the pandemic. Stronger-than-anticipated revenue growth led to large surpluses and additional rainy day fund deposits in many states. State rainy day fund balances increased 58% over fiscal 2020 levels to reach a new high of $121.8 billion. They “continued growing in fiscal 2022 to total $134.5 billion, another all-time high; this growth was widespread, with 43 states recording year-over-year increases,” according to NASBO. “A majority of states plan to continue increasing their rainy day funds in fiscal 2023.”

Illinois, for example, now has a record high of nearly $1.6 billion in its rainy day fund, up from about $60,000 in 2019.

The Fitch report stressed that “states implementing significant new spending plans or major tax policy changes could face additional budgetary pressure in the near and medium term, depending on the severity of revenue slowdowns.”

According to the Institute on Taxation and Economic Policy, eight states have already cut their income taxes this year, and debates over tax changes continue in more than 20 states.

What’s more, inflation may continue to put pressure on spending, particularly as more projects under the infrastructure bill get underway. And the fiscal cliff expected after the funds under the American Rescue Plan Act run out in 2026 could also put pressure on budgets in the future.

Keep reading as there’s more news to use below, and make sure to come back here every Friday for the week’s highlights. If you don’t already and would prefer to get it in your inbox, you can subscribe to this newsletter here. Have a great weekend.

News to Use

Trends, Common Challenges, Cool Ideas, FYIs, and Notable Events

• Colorado governor signs “enormous package” of green bills. Gov. Jared Polis signed into law Thursday a package of bills that includes reducing greenhouse gas emissions by 100% by 2050 and a program to automate and streamline local solar energy permitting. Notably, Polis signed into law a new decarbonization tax credit, which creates some $200 million in tax incentives over the next several years to promote electric bicycle, car and truck purchases, as well as geothermal, heat pump, industrial clean energy and other initiatives.


• EPA proposes power plant rules. Coal and gas-fired power plants would have to eliminate nearly all their climate-warming carbon dioxide emissions in just a little over a decade, under proposed regulations issued Wednesday by the Environmental Protection Agency. Owners of those plants have been allowed to release climate-warming carbon dioxide and other greenhouse gasses into the atmosphere for more than a century. If these proposed regulations are finalized, they would come close to putting a stop to that practice. West Virginia Attorney General Patrick Morrisey, who's also running for governor, led a legal challenge by states opposed to the 2015 Clean Power Plan. He's expected to lead a similar legal challenge to these rules, once they are finalized next year.


• “Do you read much?” Indiana Gov. Eric Holcomb signed a law that will allow parents and community members to request the banning of certain school library books they deem "offensive." School librarians could be charged with felonies for having such books. Indiana joins a nationwide movement in Republican-led states to censor classroom materials in public schools. GOP lawmakers claim they are protecting kids from sexually explicit materials like pornography. Librarians, liberals and free speech advocates say the book bans target materials about the experiences of LGBTQ people and non-white people.


• Lead in the school water. Most Illinois public school districts that tested sinks and fountains for tiny traces of brain-damaging lead as required by a 2017 state law had to tell parents they found the toxic metal in the children’s drinking water. According to the Chicago Tribune, more than 1,800 of the roughly 2,100 public schools that submitted test results identified some amount of lead in their drinking water. That includes more than 1,350 schools where at least one water sample had lead levels exceeding 5 parts per billion, the threshold where parental notification is required.


• The walkout continues in Oregon. Six Republican and Democratic legislative leaders met Wednesday to talk about the GOP-led Senate walkout, which continued for an eighth day after they talked. Republicans started boycotting the session on May 3, saying that Democrats were pushing bills they deem extreme, and arguing Senate leadership had been refusing to follow the legal process for passing bills. The walkout is preventing the Senate from having the two-thirds quorum needed to vote on bills, and it is jeopardizing legislation on a variety of issues that include housing, behavioral health and budget bills for schools, prisons and other state needs. Several Republican lawmakers risk not being able to run for reelection if they continue their boycott, under a law passed by Oregon voters last year.


• Bail reform backlash makes its way to D.C. The district’s Mayor Muriel E. Bowser said Wednesday that she plans to introduce legislation that would make it easier to detain certain people as they await trial—seeking to appear tough on crime as she prepares for a congressional hearing next week where House Republicans are expected to criticize city leaders for being too lenient with violent offenders. Her announcement comes one week after New York rolled back key parts of its 2019 bail reform law amid fears of rising crime. 


• Debt-free college for low-income Minnesotans. Minnesota students whose families make less than $80,000 annually would no longer have to take on debt to cover public college tuition under a higher education spending bill passed by the legislature. The new state initiative would be a last-dollar scholarship program, meaning it would cover any tuition costs that are left over after state and federal grants and institutional scholarships have been applied. The bill now goes to Gov. Tim Walz's desk.


• Arizona election official struggles with PTSD. Bill Gates, a lifelong Republican elected to the Maricopa County Board of Supervisors, suffers from post-traumatic stress disorder, a condition typically associated with wartime veterans and violent assaults. Gates is among many election officials whose lives were upended as they became high-profile targets under the false notion that widespread fraud had tainted the 2020 election. It is an idea that continues to be promoted by former President Donald Trump and his allies. Efforts to forcefully combat these false narratives are nearly always accompanied with threats and harassment. Even today, more than two years after the election, it is not unusual for election workers to take different routes to their homes and offices to avoid being tailed, train in de-escalation techniques and bolster their home security systems.


• Judge approves Philadelphia’s ADA settlement over curb cuts. A federal judge last week approved a class settlement between Philadelphians with disabilities and the City of Philadelphia to improve the accessibility of curb ramps throughout the city. The city must fix or install 10,000 curb ramps over the next 15 years under the agreement. The settlement comes after a judge recently ruled that Chicago must install devices at thousands of signalized intersections to help blind pedestrians cross safely in a sign that courts and the federal government are taking a harder line with cities that don’t make sidewalks accessible to people with disabilities.


• Kids eat free in Vermont. Vermont lawmakers in both chambers have now given approval to legislation that would create an indefinitely operating universal school meals program. The bill would require public schools to offer all students free breakfast and lunch. Independent schools could also opt into the program to provide meals to students who attend on public tuition. To receive the lunch benefits, schools would have to participate in federal food aid programs in order to maximize the public funding available to them. Schools would be reimbursed for the amount of money spent on the meals. Several states have taken up bills this year that would make universal free school meals permanent following the end of a similar federal pandemic-era program.


• Banning polystyrene and PFAS in food containers. Oregon on Monday became the 10th state in the U.S. to ban polystyrene foam food containers, in an effort to reduce exposure to a plastic whose chemical components have been linked to cancer and nervous system damage. A new law signed by Gov. Tina Kotek will ban the production, sale, and distribution of polystyrene foam cups and takeout food containers—as well as coolers and packing peanuts—anywhere in Oregon starting in 2025. It’s part of a broader legislative effort in the Beaver State to replace single-use plastics with reusable alternatives. The polystyrene law also bans toxic “forever chemicals” in food packaging.

Picture of the Week

Spring has sprung: Most trees have leafed out. Daffodils have bloomed (at least on the East Coast). And the grass is growing again. It is time to dust off the lawn mowers, or in some parts of the country, let out the goats. For almost a decade now, cities big and small have turned to goats in hopes of saving money and improving local streets and parks. The cloven grazers chew on poison ivy and weeds, munching on all sorts of unwanted vegetation. In the West, cities let them loose on hillsides to help prevent massive wildfires. In Hyattsville, Maryland, a suburb just outside Washington, D.C., goats are being deployed to snack on an invasive Japanese weed species called “kudzu.”

Government in Numbers

50%

The jump in deaths by firearm from 1990 to 2021 in Texas. There were 15 deaths by firearms per 100,000 people in 2021, compared to 10 deaths by firearms per 100,000 people in 1999. Over the same period, firearm-related homicides rose 66% and suicides involving firearms rose 40%. The last time Texas’ firearm death rate—including suicides, homicides and accidents—exceeded 15 per 100,000 people was in 1994. The increase comes as Texas relaxed its gun laws in a decadeslong push to expand Second Amendment rights in the state, most recently in 2021 when Gov. Greg Abbott signed what Republicans called a “constitutional carry” bill into law, allowing Texans to carry handguns without a license or training. Texas lawmakers have approved more than 100 bills that loosened regulations on firearms over the last two decades, according to data compiled by ProPublica and The Texas Tribune.

ICYMI

Cities Stare Down Huge Budget Gaps
Growing expenses and lagging downtown recoveries are straining city finances as federal pandemic relief funds run out.
BY DANIEL C. VOCK

The Fight to Reverse Increasing Maternal Mortality Rates
The U.S. has some of the highest mortality rates in the world. A study in North Carolina found approaches that are making a difference.
BY RACHEL GOTTLIEB

How to Ensure Millions of Children Don’t Lose Medicaid Coverage Erroneously
COMMENTARY | More than 5 million children could lose their Medicaid benefits during the public health emergency’s Medicaid “unwinding.” The U.S. has the data and experience to prevent this.
BY DR. RICHARD E. BESSER AND JOAN ALKER

The Complications of Land-Use Reform
Colorado needs more homes. Research shows land-use reforms typically result in just that. So why did a massive land-use bill die in the state Senate this week?
BY MOLLY BOLAN

Congestion Pricing in Manhattan Clears Federal Hurdle
The city still has to determine the details before New York becomes the first American city to charge for the right to drive on certain roads.
BY DANIEL C. VOCK

States Take Up Bills to Confront Youth Homelessness
From couch surfing to living in the streets, it is easy to overlook young people experiencing homelessness. That’s changing.
BY MOLLY BOLAN

States Differ Over What's a 'Disadvantaged' Community
The definitions states are using to define a disadvantaged community varies widely, and it is leaving many low-income communities out of federal funding for essential water projects.
BY KERY MURAKAMI