Tim Henderson | (TNS) Stateline.org
From providing healthcare for immigrants in California to offering school vouchers for all students in Tennessee, states are having to reconsider costly projects due to declining tax revenues and the conclusion of federal pandemic aid.
According to a Stateline analysis of U.S. Census Bureau data released this month, state tax revenue dropped by 4% last year. estimates Revenue has increased by about 28% since 2019, which is higher than the inflation rate of about 18% during that time. California and New York suffered a large portion of the loss, even when considering their large populations, with a combined $56 billion in state tax revenue lost, the majority of the $66 billion national loss. Governor Gavin Newsom of California, facing a budget deficit that has grown significantly, has urged lawmakers to revisit the state budget for adjustments, including a proposed $1.5 billion tax increase on health insurers to sustain an expansion of state health insurance for low-income individuals regardless of immigration status.
Assemblymember Bill Essayli, a Republican, criticized the expansion as using money the state does not have for undocumented immigrants in a March 14 budget committee meeting before an Assembly vote. However, Democratic Assemblymember Akilah Weber, who is also a San Diego physician, argued that the expansion would enable them to continue their work and assist patients without having to reduce services.
The governor and lawmakers are in discussions about other budget changes, which could involve additional taxes or billions of dollars in cuts to school construction, homeless housing, broadband, or transit funding. $73 billionThe proposed higher tax would need to be approved by March 21 to receive federal approval. Conservative agendas are also facing scrutiny as tax revenues decreased in 32 states last year and failed to keep up with inflation in 40 states and the District of Columbia, as per the Stateline analysis. Republicans in Tennessee support Governor Bill Lee's $140 million proposal for universal school vouchers. However, some GOP members are questioning the increased public school funding meant to ease opposition from Democrats and others who are concerned the program will harm public schools due to a budget deficit.
State Representative Charlie Baum, a Republican, pointed out that the current House version of Lee's voucher plan includes an extra $320 million for public school funding in rural areas, staff health insurance subsidies, and construction costs – spending that the state cannot afford given its $400 million budget deficit.
Some states are introducing new taxes as their surpluses diminish. In New Jersey, where state tax revenue dropped by 4% last year but remains 32% higher than 2019, Governor Phil Murphy has asked lawmakers to approve a tax on large businesses to raise about $1 billion this year to support the state transit system. The additional funds may help preserve a program to reduce property taxes for older individuals.
In Arizona, a projected $1.7 billion budget deficit looms after a flat income tax enacted by Republican Governor Doug Ducey in 2021 took effect last year.
suggested taking back money from road projects and school vouchers
approved under more optimistic predictions. The Stateline analysis reveals that Arizona state tax revenue decreased by 8%, or around $1.9 billion, last year compared with 2022, but was 26% higher than in 2019.
Reducing taxes during the pandemic may have negative consequences for states like Arizona, impacting their ability to improve things such as schools and housing, according to Wesley Tharpe, senior adviser for state tax policy at the left-leaning Center on Budget and Policy Priorities. “More than half of states took advantage of temporary surpluses following the COVID-19 recovery to make permanent cuts to their state income tax,” Tharpe stated. “In several states, such reductions, like in Arizona, North Carolina, and West Virginia, are truly historic. When states make such deep tax cuts, it not only means they may have to reduce services, but they are also forgoing revenues that could be used for unmet needs.” However, conservatives argue that cutting taxes will ultimately benefit states by returning more money to consumers and attracting high-income workers.
“Most states that reduced taxes found ways to provide responsible, sustainable tax relief,” said Jared Walczak, vice president of state projects at the pro-business The Tax Foundation. “Tax competition is more important than ever, and if you are balancing a budget, you would much rather be in the tax-cutting Mountain West than some of the tax-increasing states on the coasts right now.” also experienced double-digit decreases in state tax revenue. Falling oil prices in 2023 negatively affected some states. Alaska saw the largest percentage decline in state tax revenue last year: 50%, or $2.1 billion, although the state
is anticipating an increase
this year due to higher oil prices, and state tax revenues remain 32% higher than in 2019.
Maryland, which — like California — relies heavily on income tax revenue from high earners, is grappling with
political conflicts
Utah and Iowa over whether to reduce spending or raise taxes in light of ongoing disappointments in tax revenue that resulted in a $500 million deficit in the proposed budget.
States had become accustomed to having their revenue and spending it as well, as most states were able to cut taxes and increase spending simultaneously due to stimulus funding, a thriving economy, and consumer spending that boosted tax collections. Now, decisions are becoming more difficult as consumers tighten their budgets, tax cuts take effect, stimulus spending ends, and some sources of high-income jobs such as energy and tech have declined. One concerning new trend from late 2023 continuing into this year: reduced sales tax revenue as consumers spend less on retail items, according to Lucy Dadayan, principal research associate at the Urban-Brookings Tax Policy Center. “This is concerning,” Dadayan stated. “The two holiday months, November and December, witnessed declines in sales tax, indicating that consumers are tightening their budgets.”
a 2% decrease in March sales tax revenue allocated to local governments based on January sales, and Arizona retail sales tax revenue increased only by 1% in January , the smallest growth in ten years. Maryland is thinking about broadening its sales tax to more services because of a decrease in retail sales.
The unexpected decrease in sales tax is particularly difficult for small towns that rely on it to fund essential services like law enforcement and firefighters. Sales tax earnings account for over 43% of the budget for Greenwood, Arkansas, a city of around 9,600 near the Oklahoma border. The sales taxes are staying roughly the same this year instead of increasing by 4.5% as predicted, according to Finance Director Thomas Marsh.
Greenwood’s sales tax income increased by 50% during the pandemic as large retail stores and restaurants in the nearby city of Fort Smith closed and residents started shopping and eating out closer to home or online — an
Arkansas state law
Texas reported mandated local sales tax for online purchases beginning in 2019. City officials expected the growth to slow down, but they were surprised when it stopped in January and February, potentially leading to a hiring freeze and the postponement of construction projects if the situation continues, Marsh explained. David Thurman, director of Tennessee’s Budget Analyst Agency and president-elect of the National Association of State Budget Officers, stated that Tennessee and other states should hold off on ambitious programs for a “reset year” while taxes return to pre-pandemic growth levels.“We’ve designed the [fiscal] 2025 budget to cover the regular cost of government but little else,” Thurman stated. “I believe we should all proceed more cautiously until we have a better understanding of what the new normal will look like.”
©2024 States Newsroom. Visit at
stateline.org . Distributed by Tribune Content Agency, LLC. State tax revenue dropped by 4% last year, according to a Stateline analysis of U.S. Census Bureau estimates issued this month. Revenue has still increased since 2019 by around 28%, higher than the inflation rate of about 18% in that period.
David Thurman, director of Tennessee’s Budget Analyst Agency and president-elect of the National Association of State Budget Officers, said Tennessee and other states need to take a step back on ambitious programs for a “reset year” while taxes drift back to pre-pandemic growth levels.
“We’ve structured the [fiscal] 2025 budget to allow taking care of the normal cost of government but do very little else,” Thurman said. “I think we should all move forward more cautiously until we get a better read on what the new normal will be like.”
©2024 States Newsroom. Visit at stateline.org. Distributed by Tribune Content Agency, LLC.
