A slowdown in tax revenues, a surge in health care costs, and bills due from tax cuts – for many state governments, the new year promises to bring budget headaches.
Economic forecasts at year’s end show at least a dozen states facing a combination of factors that could mean tough decisions and tight budgets after six golden years of budget surpluses.
“They’ve got to live with the tax cuts they’ve enacted in the last few years, they’ve got to pay for the program expansions they’ve put in place,” said Marcia Howard, who tracks state economies for Federal Funds Information for States. “And now, all of a sudden, health care has taken off again.”
A spike in Medicaid costs, after years of slight growth in the federal-state health insurance program for the poor, was one factor cited by several states grappling with overly optimistic projections.
Over the past decade, Indiana saw Medicaid costs barely budge. But this year, they jumped at least 10 percent, with a price tag of $100 million and counting, said state Rep. B. Patrick Bauer, chairman of the budget-writing House Ways and Means Committee.
The reasons? High prescription drug costs and the addition of uninsured children to Medicaid rolls, said Kathy Gifford, state Medicaid director.
“That’s kind of the double whammy,” she said, adding that many other states also broadened their eligibility requirements to insure even more people. “That all will come home to roost.”
In Ohio, Medicaid costs jumped 18 percent after years of growth at 4 percent or less, said Thomas Johnson, state budget director. Now officials are asking legislators to spend $237 million to pay for the increase.
“From the mid- to late ’90s, medical inflation slowed down quite a bit. It had a lot to do with HMOs,” said economist Steve Cochrane, who tracks states for Economy.com, an economic analysis service. But now, “all the cost containment that could be squeezed out of the system has already taken place.”
The higher costs come at a time when states have reduced their own tax revenue by cutting taxes. Over the past six years, states cut $35 billion in taxes, according to the National Conference of State Legislatures. Indiana, for example, cut taxes by $400 million over the past four years.
Now, the latest reports show some weakening tax revenue. In the financial quarter that ended in September, sales tax revenue fell in Maine, Indiana and Ohio, according to the Fiscal Studies Program at the Rockefeller Institute of Government. Many other states saw lower growth than they expected.
Personal income tax revenues remained strong, however, and nationwide, third-quarter revenues were the strongest in 10 years of study, the program found.
Some states continued to rake in big surpluses, with California leading the way with a predicted $10.3 billion. But other states – mostly in the Midwest and Southeast – see signs of a very different new year.
Indiana, Louisiana, Maine, North Carolina, Ohio, South Carolina, Tennessee, Virginia, North Dakota, West Virginia and Wisconsin report that revenue will not meet earlier forecasts.
Still, most state economies grew – they just didn’t grow as strongly as expected.
In Virginia, that puts in doubt the next step in repeal of the state’s car tax, a campaign promise of Gov. Jim Gilmore that would cost $1 billion in the coming year.
Maine budget officials said budget requests may have to be cut by $300 million. And Texas figures it will have to spend an extra $700 million for Medicaid, despite an estimated $1 billion surplus.
“State legislatures are going to have to be fairly cautious this year. It’s not a year for strong optimism,” said Cochrane, the economist. Still, he wasn’t all gloom: “It’s not a year for fears, either.”
His words were echoed by many budget writers.
While Indiana had been expecting the economy to grow at a healthy 5.5 percent, it is down to 4 percent or even 3.5 percent. “If that’s as low as we go, it’s not bad yet,” said Bauer, who has helped write Indiana’s budget for two decades.
A study by the National Association of State Budget Officers found that half of 29 states surveyed reported signs of a weakening economy, and that five might have to consider immediate cuts.
But the forecasts remain preliminary. Christmas could ring in big sales taxes. Wall Street responded with a rally on Tuesday when Federal Reserve Chairman Alan Greenspan signaled that interest rates could be cut to ward off a recession.
For the states, the financial picture will come clear as state economists sharpen their forecasts in the winter and spring.