States' budgets begin to rebound

Higher taxes and the recovering economy help.
WASHINGTON POST
CARSON CITY, Nev. -- One year ago, Kenny Guinn recalls, the state of Nevada was like a casino gambler digging into his life savings just to stay in the game. "We had built up $136 million in a rainy-day fund," the white-haired Republican governor remembers with a grimace. "And things were so tight, we ended up using $135 million of it to get our budget balanced."
But this spring, Nevada -- along with many other states -- has found a winning hand. A brace of newly enacted fees and taxes, coupled with the reviving economy, has put the budget firmly in the black for fiscal 2004. "We're way ahead of our projections, and we'll be able to put back a lot of the millions we took from that fund," Guinn says proudly.
A similar pattern is playing out across the country, two new surveys show, as state governments report the strongest tax revenue and healthiest budgets they have seen in the 21st century. "After three years during which state revenues proved exceedingly dismal, the picture is notably -- but cautiously -- brighter at the end of fiscal 2004," noted a report last week from the National Association of State Budget Officers. The National Conference of State Legislatures has found that eight states have all major taxes performing higher than projections.
Some cautious
State governments report the strongest tax revenue and healthiest budgets they have seen in the 21st century; some states feel confident enough to launch new programs, but with unemployment still a serious concern in much of the country, and the cost of Medicaid -- government-paid health care for the poor, which is partly funded by states -- rising fast, most states are sticking with austerity plans, regardless of the better budget news this year.
"Despite some improvements in the states' fiscal situations," says Scott Pattison, executive director of the state budget officers' association, "the picture is far from rosy, given the unprecedented strain of the last three years."
In urging the Virginia General Assembly to approve one of the biggest tax increases in the state's history this year, Democratic Gov. Mark R. Warner often said that revenue would never match the government's growing obligations despite the improving economy.
So in Virginia and many other states, taxes will continue to go up next year. The budget officers' group notes that more than half the governors have called for tax and fee increases for fiscal 2005, which begins July 1 in most states. Only four governors have called for tax cuts. Many cities also are raising taxes, and seeking to boost revenue from sources such as parking meters and library fines.
These tax increases at the local level tend to offset the stimulative effect President Bush hoped to create with federal tax cuts.
Big difference
Still, widespread tax increases imposed by legislatures last year, together with a swarm of newly enacted fees -- Nevada, for example, has begun collecting a "transfer fee" on every real estate purchase -- made a big difference for the state governments, according to the new studies from the NCSL and the NASBO.
"While budget surpluses were virtually unheard of recently, modest ones now are starting to appear," the NCSL study reported, and even the states with projected deficits are in better shape than they were a year ago.
The NCSL survey showed that only seven states had budget deficits as of this April, with a relatively small total shortfall of $720 million that has to be made up before the end of the fiscal year. That is dramatically better than the situation a year earlier, when more than half of the states were in the red and the total shortfall was in the tens of billions of dollars.
The NASBO study showed a similar pattern, with states more able to increase their budgets. In fiscal 2003, in the depths of the downturn, states generally could not afford increased spending; states increased their budgets overall by about half of 1 percentage point that year. For 2005, however, governors are projecting a 2.8 percent spending increase.
Even that rate of growth would be fairly anemic by historical standards, however. Over the past quarter-century, NASBO notes, state budgets overall averaged 6.2 percent annual increases, and in the boom years of the 1990s, budgets climbed faster than that.
Key factors
The key factors in the states' improving fiscal condition are generally the same factors that have made the difference here in Nevada. Tax rates are higher than before, and the rebounding economy means taxes on personal income and corporations are bringing in more revenue. As the unemployed begin to find jobs, meanwhile, states need less money for programs aiding needy families.