When Bruce Rauner becomes the governor of Illinois next month, the Republican businessman will inherit a budget shortfall so deep he is already apologizing for the painful cuts his administration will have to make.
Maryland Gov.-elect Larry Hogan’s (R) priorities may be put on hold as well as he makes cuts necessary to make up for a $900 million budget gap. Pennsylvania’s incoming governor, Tom Wolf (D), will have to fill a $1.8 billion budget hole left by his predecessor when he enters office.
Across the country, five years after the economic recession blasted major holes in government budgets, many states are still struggling to balance their books. The red ink is not limited to one party: Maryland’s shortfall grew under Democratic Gov. Martin O’Malley, while Kansas’s nearly $1 billion shortfall over the next two years is a product of tax policies backed by Republican Gov. Sam Brownback.
At least 16 states are projected to run budget shortfalls in the next year or two, according to an informal count maintained by State Budget Solutions, a watchdog group. Those gaps range from lows of $17 million in Vermont and $34 million in Rhode Island to $4 billion in Washington State over the next two years and $2.2 billion in Wisconsin next year alone.
The gaps come even as tax revenues are rebounding. The nonpartisan Rockefeller Institute reported on Thursday [pdf] that tax revenues rose in 41 states in the third quarter over the same period last year, led by a 5.9 percent increase in sales tax collections and a 4.3 percent rise in personal income taxes.
The growth isn’t strong enough to make up for the increasing costs states must shoulder. Scott Pattison, the executive director of the National Association of State Budget Officials, said rising Medicaid and health care costs are to blame in many states.
“State and local governments are coming out of the recession, but they’re still somewhat cautious about spending money,” said Tracy Gordon, a senior fellow at the Urban Institute’s tax policy center.
In Arizona, state Treasurer Doug Ducey (R), who will assume the governor’s office in January, will have to find another $1.5 billion to cover projected shortfalls over the next two years after the state legislature’s Finance Advisory Committee projected lower tax revenues over the next two years.
Gambling and mining tax revenues will leave Nevada’s budget about $162 million short of initial projections, the state said this week. Gov. Brian Sandoval (R) has said he will push tax reform to make up that gap.
“Revenue isn’t quite as robust as [states] would need or would have wanted in the fifth year of an economic recovery since the recession,” Pattison said.
Declining oil prices, too, have put a damper on state revenues. Many energy-producing states rely on revenue from oil and gas companies — called severance taxes — for significant parts of their budget. With the price of U.S. crude oil dropping from $100 a barrel earlier this summer to less than $60 a barrel this week, those severance taxes won’t be the boon they have been in past years.
Alaska, a state in which oil tax revenue finances 90 percent of the budget, will be particularly hard-hit. Former Gov. Sean Parnell (R), who lost his re-election bid earlier this year, passed a law removing some taxes on oil and gas companies to spur production. That tax cut, coupled with lower prices, will leave Alaska’s new governor, Bill Walker, an independent, with a projected $3.5 billion shortfall.
Louisiana projects a $1.4 billion shortfall, which state officials blame mostly on falling oil prices. Even officials in North Dakota, which is still running a budget surplus, are particularly worried: The decline in oil prices sent state oil and gas production tax collections plummeting more than 10 percent over a two-year period.
Some governors are being forced to deal with budget deficits thanks to their own actions. In Kansas, Brownback’s administration faces a projected $279 million shortfall for the fiscal year ending June 2015, and a $715 million shortfall in the next fiscal year, after tax cuts he backed caused revenue to plummet.
Alabama Gov. Robert Bentley (R) will have to find more than $950 million over the next few budget cycles after borrowing money to pay bills from the state’s rainy-day fund. Budget gimmicks, like borrowing from future years to pay for current expenses or pushing current expenses onto later fiscal years, have put New Jersey and Illinois billions in the red as well.
Others are struggling to comply with rising costs. Washington State has had to increase spending on education, mental health and foster care programs under various court orders issued in recent years that will cost far more than the state’s modest revenue growth would cover.
And states like Virginia and Maryland, heavily dependent on tax revenue generated by the federal government, are still suffering the effects of budget sequestration. Virginia Gov. Terry McAuliffe (D) announced in October he would lay off state staffers and cut budgets to make up for a $2.4 billion multi-year deficit. Hogan, once he takes office in January, will likely have to take similar steps.
The fiscal cliff of 2012 has thrown ordinarily mundane budget projections in many states into turmoil. The expectation that tax rates would rise as a result of budget negotiations that year led many money managers, corporations and high-income earners to report income or sell stock at the end of 2012.
Those transactions resulted in huge windfalls in the first half of last year, when personal income tax revenue soared 18 percent and corporate income taxes rose about 10 percent. But the revenue that came in during 2013 effectively robbed state budgets of revenue during 2014, which many state budget planners didn’t foresee.
Unlike the federal government, states don’t have the luxury of running a deficit. Forty-nine states have constitutional or statutory provisions requiring a balanced budget, and Vermont, the lone state without such a provision, makes a practice of keeping its books balanced.
That means painful cuts ahead, or borrowing from rainy day funds, in many states. Already, Louisiana Gov. Bobby Jindal (R) has implemented cuts to stave off his state’s gap. Outgoing Massachusetts Gov. Deval Patrick (D) has already cut $200 million from his state’s budget. Alaska will likely dig deep into a reserve fund to cover the difference.