Bull market gives states surpluses, and new challenges


Gov. Jerry Brown is backing a plan to save much of California’s budget surplus (AP Photo/Rich Pedroncelli)

Florida lawmakers will consider a plan this week to reduce license plate fees by up to $30 for every car. Wisconsin legislators are expected to cut half a billion dollars in property and income taxes, while Iowa has already passed billions in tax cuts.

Across the country, state lawmakers and governors who had grown accustomed to recession-era budget shortfalls and politically painful cuts to schools, roads and other services are once again flush with cash. Now, they are debating whether to give some of it back to the taxpayers, spend it or save it for another rainy day.

The new surpluses are the result of a booming stock market, which has fueled a surge in personal income tax revenue in some states while boosting sales tax receipts in others. In California alone, the initial public offerings of Facebook and Twitter, which created hundreds of new millionaires and billionaires, pumped up to $3 billion into state coffers from capital gains taxes.

That new money has freed state politicians, many of them running for reelection this year, from having to disappoint constituents with dismantled programs and further cuts. Now, they can afford to give voters something to feel good about.

“It’s a lot more fun to do this job when you’ve got a little money than when you don’t,” said Florida state Sen. John Thrasher (R), a member of the legislature’s joint budget committee. “The good news is, we can do most of the things that we feel are priorities for the state.”

The extra money has come as a bit of a surprise.

Policymakers were predicting more budget turmoil for states after the run-up to the “fiscal cliff” battles in Washington and continued uncertainty over tax rates and federal cuts.

As the stock market hummed, though, revenue perked up. Twenty-eight states ended fiscal 2013 with a surplus.

Now, surpluses are projected in all but a handful of states by the end of this fiscal year, which for most states ends June 30.

Idaho is projecting an $80 million surplus. Michigan is expecting to come in $971 million over budget. And Arizona expects $200 million in additional funding.

“Most states look like they’ll be above forecast. It really does provide a bit of a cushion and allows them, maybe not to embark on huge spending program, but to have a little bit more money,” said Scott Pattison, executive director of the National Association of State Budget Officers.

Only a few states expect deeper cuts to come. Pennsylvania is projected to run about $1 billion in the red this year, while revenue is down in Mississippi, New Jersey and Nevada.

New Jersey budget officials estimate a $400 million to $500 million shortfall this year as tax revenue comes in slower than anticipated. Gov. Chris Christie (R) said in his State of the State address that the cost of contributing to pension funds for public workers and paying back money borrowed through state bonds is up by $1 billion.

But in most state capitals, happy days have come again for lawmakers.

In Florida, where Gov. Rick Scott (R) faces a reelection challenge from likely Democratic nominee and former governor Charlie Crist, Tallahassee lawmakers have a $1.1 billion surplus to play with.

They are scheduled to vote this week on a $400 million package of tax cuts, including the rollback of the car license plate fees.

But in other states, the surpluses are sparking battles that pit lawmakers who want to restore many of the recession-era cuts or to spend money on new social programs against those scarred by the recession’s difficult choices and eager to save for a future rainy day.

Nowhere is that tension more pronounced than in California, where some Democrats have pushed to use the state’s surplus, currently estimated at $4.6 billion, or about 3 percent of the state’s overall budget, to establish universal pre-kindergarten programs.

But others, led by state Assembly Speaker John A. Prez (D) and Gov. Jerry Brown (D), will move to place a measure on the November ballot that would automatically direct sometimes-volatile surplus dollars into a special reserve fund.

The debate has heated up in California amid the influx of cash from the Facebook and Twitter IPOs.

Meanwhile, a voter-approved measure passed in 2012 raised personal income taxes on California residents who make more than $250,000 a year, which captured billions in capital gains taxes. Brown’s office estimated that the proposition has already brought in more than $8 billion.

The measure that would be on the ballot this year would divert capital gains tax revenue over a certain share of total state revenue into a rainy-day fund.

“If we had done this 15 years ago, it would have all but eliminated the budget impact of the dot-com recession at the beginning of the decade, and it would have cut about in half, in budgetary terms, the impact of the Great Recession,” Perez said in an interview. “You can’t treat those one-time revenues like they were ongoing.”

At a news conference rolling out his proposed 2014-2015 budget in January, Brown highlighted the peaks and valleys of tax revenue from capital gains. He said he favored rebuilding the rainy-day fund rather than using a volatile funding source to fuel new programs, especially given the state’s looming pension liability.

“There’s significant liability out there that has to be dealt with,” Brown said in a subsequent interview. “The idea that you’d take this little bitty surplus and go on this big spending spree strikes me as odd.”

In other places, particularly states run by Republicans, lawmakers say they are proceeding cautiously.

“We learned during the Jeb Bush years, when the economy was pretty good, that you’ve got to have some extra resources for the down years,” said Thrasher, who was speaker of Florida’s House during Bush’s first term as governor in the late 1990s and helped push through large tax cuts. “That’s probably the first place that we’ll put some more resources in this year.”

In Iowa, legislators have intentionally avoided using one-time funding to pay for ongoing expenses. Instead, the state has used the money to pay for transportation projects that cost far less to maintain in the long run than to build in the short run.

“We actually refer to [the surplus] as an over-collection of taxpayer dollars,” said Rep. Linda Upmeyer (R), Iowa’s House majority leader. “The importance there is that it reminds us that it should not be used to inflate our ongoing expenses.”

“We have stuck to our core budgeting principles, at the same time we have enjoyed a growing economy,” she added. “The beauty of our approach is that it also means that when things slow down, we can avoid the mistakes of the past like across-the-board cuts.”

Reid Wilson covers state politics and policy for the Washington Post's GovBeat blog. He's a former editor in chief of The Hotline, the premier tip sheet on campaigns and elections, and he's a complete political junkie.
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