The Center's work on 'Budgets' Issues


States Are Starting to Save for Another Rainy Day

April 16, 2014 at 1:19 pm

With the budget challenges of the Great Recession and its aftermath still fresh in their minds, state policymakers are considering ways to strengthen their “rainy day funds” — budget reserves they can use when recessions or other unexpected events cause revenues to fall or spending to rise.  But, it’s still premature for most states to act aggressively to refill the funds until their revenues rise well above pre-recession levels, unemployment has declined further, and they have restored programs cut during the recession, as we explain in a new paper.

States used their rainy day funds to avert over $20 billion in cuts to services, tax increases, or both, in each of the last two recessions, highlighting the funds’ importance.  Since draining reserves to a low of 2.4 percent of spending in state fiscal year 2010, states have begun to refill them partly (see chart).

The decisions about when and how quickly to refill a rainy day fund will be different for each state.  Here are some questions that states should consider:

  • Have tax collections recovered from the recession?  One sign that a state has sufficient funds to begin refilling its rainy day fund is that both its annual tax collections and its annual growth in tax collections have returned to pre-recession levels, after accounting for inflation.  Fewer than half of the states have recovered to this extent.
  • Has the state’s economy recovered?  A return to pre-recession unemployment rates and personal income indicates that the state’s economy is on the mend.  Then the state can more likely meet the needs of its residents and also set funds aside for future downturns.  Most state economies have not yet fully recovered from the downturn.
  • How big is the rainy day fund?  Resuming fund deposits is a higher priority in states with little or no funds remaining.  These states may want to spread the replenishment over more years and should consider beginning sooner.  At the end of fiscal year 2013, 16 states had general fund reserves of less than 5 percent of the budget. 
  • What else might states do with available funds?  A rainy day fund’s ultimate goal is to help maintain state support for education, health care, transportation, and other services that promote economic growth and meet residents’ needs.  If depositing money in the fund would jeopardize a state’s ability to support these programs adequately — especially after years of funding cuts in an economic downturn — program funding should take priority. 
  • Is the state experiencing a revenue “windfall”?  Some states’ revenue collections are temporarily high as a result of a court settlement or other short-term reason.  For example, Connecticut received $175 million this year from a temporary tax amnesty program, and Louisiana is receiving payments from BP as a result of the 2010 oil spill.  States should use caution when deciding how to spend these temporary windfalls.  Shoring up a rainy day fund is a prudent use of one-time funds, while enacting ongoing program expansions or permanent tax cuts could contribute to future budget imbalances.

Click here to read the full paper.

States’ Sluggish Recovery Continues

April 4, 2014 at 3:06 pm

State tax collections have finally reached their pre-recession levels, according to new data from the Census Bureau.  Those collections are now 0.4 percent higher than six years ago, after adjusting for inflation.  This news is welcome, but not cause for celebration.

The recession of 2007-09 caused deep, sustained and unprecedented revenue losses. Revenue fell a record 12 percent in the average state, even deeper in states with the hardest-hit economy.  And the recovery has been the slowest in decades (see graph).

These drastic revenue losses have prompted many states to make serious cuts to K-12 education, public colleges and universities, libraries, human services, and other public services.  The sluggish recovery means that states are serving larger populations, including more school kids and more seniors, with the same amount of money as six years ago.

5 Reasons Other States Shouldn’t Follow Kansas’ Tax-Cutting Lead

March 27, 2014 at 3:11 pm

One of the largest tax cuts any state has ever enacted took effect in Kansas at the beginning of last year.  The state sharply reduced its income tax rates and fully exempted certain business profits from taxation.  It also adopted a plan to cut income tax rates even further over the next few years.

Now, in a number of other states, proponents of tax cuts are saying that Kansas’ approach is a model for how to grow a state’s economy.  As we explain in our new paper, Kansas is anything but.  In fact, it’s a cautionary tale for five major reasons.

  1. Deep income tax cuts caused large revenue losses.  Kansas’ tax cuts this year are costing the state about 8 percent of the revenue it uses to fund schools, health care, and other public services, a hit comparable to a mid-sized recession.  State data show that the revenue loss will rise to 16 percent in five years if the state does not reverse the tax cuts.
  2. The revenue losses extended and deepened the recession’s damage to schools and other state services.  Most states are restoring funding for schools after years of significant cuts, but in Kansas the cuts continue (see chart).  Governor Sam Brownback recently proposed another reduction in per-pupil general school aid for next year, which would leave funding 17 percent below pre-recession levels.  Funding for other services — colleges and universities, libraries, and local health departments, among others — also is way down, and falling.
     
  3. The tax cuts delivered lopsided benefits to the wealthy.  Kansas’ tax cuts didn’t benefit everyone.  Most of the benefits went to high-income households.  Kansas even raised taxes for low-income families to offset part of the revenue loss; otherwise the cuts to schools and other services would have been greater still.
  4. Kansas’ tax cuts haven’t boosted its economy.  Since the tax cuts took effect at the beginning of 2013, Kansas has added jobs at a pace modestly slower than the country as a whole.  Average earnings fell more in Kansas in the year after the tax cut than in the rest of the country over the same period, while non-farm personal incomes rose less in Kansas than the nation as a whole. And so far there’s no evidence that Kansas is enjoying exceptional business growth: the number of registered businesses grew more slowly last year than in 2012, and the state’s share of all U.S. business establishments fell over the first three quarters of last year, which is the latest data available.
  5. There’s little evidence to suggest that Kansas’ tax cuts will improve its economy in the future.  No one knows for certain how Kansas’ economy will perform in the years ahead, but it isn’t likely to stand out from other states.  The latest official state revenue forecast, from November 2013, projects Kansas personal income will grow more slowly than total national personal income in 2014 and 2015.

Kansas’ tax cuts have meant big revenue losses and continued cuts in schools, colleges, and other services, with no noticeable economic gains.  That’s not a recipe that other states should want to follow.

Click here to read the full paper.

McNichol: Oklahoma Falls Far Short in Long-Term Budget Planning

March 12, 2014 at 2:14 pm

Oklahoma tied for last (with South Dakota) in our recent report on how well states factor long-term issues into their budget decisions, CBPP Senior Fellow Elizabeth McNichol and the Oklahoma Policy Institute’s Gene Perry write in an op-ed for The Oklahoman.  The excerpt below outlines one way that Oklahomans can improve their budget process:

Better revenue forecasting is one place to start. Oklahoma lacks a formal mechanism to create consensus among the executive and legislative branches on a revenue forecast. Over half the states use an estimating process that brings together the expertise of both branches of government, and often academic and private economists, to agree on a revenue forecast.

In Oklahoma, the responsibility for the state’s revenue estimate rests almost entirely with one economist at Oklahoma State University. Granted, the economist is one of the foremost experts on Oklahoma taxes. But given the many variables that affect this important forecast, two — or even three or four — heads are surely better than one.

Our report details how states can improve their budget processes and ranks states on their use of ten proven, common-sense budget tools.

Brownback Reiterates Faulty Claim to Justify Radical Tax Cuts

February 25, 2014 at 3:30 pm

Kansas Governor Sam Brownback said recently that his radical 2012 income tax cuts — among the largest that any state has ever enacted — generated over 15,000 small businesses in Kansas.  He’s made this claim before, such as to the New York Times last month.  It’s one of his top arguments that the tax cuts have worked.

But it’s misleading, at best.

First, while more than 15,000 new businesses were incorporated in Kansas in 2013, more than 16,000 other businesses were either dissolved by their owners or forfeited for failure to file an annual report and pay the annual fee.  Even adding in the 4,500 businesses that owners reinstated that year (by filing annual reports after letting their status lapse), the net growth in registered businesses was about 3,600 — smaller than in 2012, the year before the tax cuts took effect.

More importantly, proponents of the tax cuts said their goal was to create real jobs.  But, private sector job growth in Kansas since the tax cuts took effect ranks among the lowest of any state — 46th fastest as of the latest data.

Meanwhile, the tax cuts have led to a big drop in revenue for the state, deep cuts in services, and an overall weakening of the state’s economic prospects.