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Revenue Is Starting to Burn Holes in States' Pockets
Fiscal Posture Turns Around

By T.R. Reid
Washington Post Staff Writer
Wednesday, December 21, 2005

A $300 million tax refund in Hawaii. A full day of kindergarten for every 5-year-old in Delaware. A light-rail line from Denver's airport to downtown. Cheap health insurance for middle-class families in Illinois. Property tax cuts in New Jersey and Pennsylvania. A new tram lift for Wyoming's biggest ski resort.

With legislatures from Augusta to Honolulu due to gather next month to approve spending for fiscal 2007, the states are awash in proposals such as these to take advantage of budget surpluses. After four tough years of tax increases and budget cuts, state governments are cautiously starting to spend again amid climbing tax revenues.

"Revenues improved notably in fiscal 2005, enabling many states to begin restoring funding to programs cut during the previous economic downturn," noted a Fiscal Survey of the States issued yesterday by the National Governors Association and the National Association of State Budget Officers.

With the federal government expected to run up a record deficit for the fifth straight year, states have climbed into the black by doing precisely what Washington did not do. As the Bush administration cut federal taxes and increased government spending year after year, the states slashed programs left and right while boosting taxes, tuition bills and user fees.

Even in the current year, with revenues strong, half the states passed additional tax increases, the survey said. Fourteen states cut taxes, but overall state taxes went up $2.5 billion.

The result has been a dramatic reversal of fortunes in most of the 50 capitals. A survey by the National Conference of State Legislatures in November found that 48 states -- all but Rhode Island and Louisiana -- expect revenues to improve or remain stable for the next fiscal year. A similar survey in November 2002 showed that 38 states were expecting a drop in revenues.

Maryland and Virginia budget data reflect the national trend. Maryland's tax revenues have increased $1.4 billion over the past three years, the biggest jump in state history. Virginia ran up record revenues in 2005, leaving the state a surplus of about $1.8 billion.

Economists note that state governments -- which generally are barred from deficit spending -- have become one of the few spots in the U.S. economy to generate savings. "Personal saving rates are minimal, and the federal government is deeply in deficit," notes Scott Pattison, executive director of the budget officers' association. "But the states are putting money back into their rainy-day funds."

A budget in the black is often seen by governors and legislatures as an invitation for more spending. New Mexico, for example, plans to use a sizable chunk of its $1 billion surplus to build a commercial "spaceport" for a British firm planning tourist trips into space.

In Wyoming, where oil, gas, and coal taxes have produced a surplus about two-thirds the size of the state budget, Gov. Dave Freudenthal (D) has been inundated with requests for new roads, schools, hospitals and airports. People in Jackson Hole, beneath the jagged peaks of the Teton Range, have asked the state to replace the aging tram that runs to the top of the ski slopes at a Teton Valley resort.

Health care and education are major areas of increased state spending. Illinois is one of several states trying to assist families that have too much income to qualify for free care but still cannot afford health insurance premiums. The state's new "All Kids" program will provide low-cost health insurance to families with children in that situation. Comprehensive care for a family of four making $40,000 annually will cost $40 per month, with the state paying the rest of the insurance bill.

State governments pay about half the cost of Medicaid, the national program offering medical care to low-income patients. With more people losing insurance coverage, Medicaid has become the nation's biggest health care plan -- and a major drain on state budgets. The fiscal survey noted that Medicaid costs rose 7.5 percent in fiscal 2005, and further increases are certain next year.

The Medicaid burden is expected to dampen somewhat legislators' enthusiasm for new spending in the coming fiscal year. "Increased tax revenue is good news for the states," notes Pattison. "But the bad news is that things like Medicaid, that you have to pay for, still cost a fortune."

As a result, most states are expected to be cautious next year when it comes to approving new spending.

"The memory of the really bad downturn we had from 2002 to 2004 is strong," Pattison said. "And there's always Medicaid. And a lot of states want to build up their rainy-day funds in case the economy goes soft again. So all of that is going to limit somewhat the momentum for new programs."

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