State-level projections indicate that every state faces at least a small gap, with 29 states looking at gaps of 5% or more. Recent economic gains and increases in state tax revenue make shortfalls in many states less than those that occurred in 2001 and 2002. The projections nevertheless suggest that state and local governments will face continuing fiscal stress.
|Projected State and Local Deficits after 8 Years, Calculated as Percentage of Revenue
|Source: Donald Boyd, State Fiscal Outlooks from 2005 to 2013: Implications for Higher Education (Boulder, CO:NCHEMS, 2005).|
There are three main reasons for this condition.
- Tax revenue will not grow as fast as the economy because:
- Economic growth is not projected to generate major annual surges in capital gains income. Stock markets unlikely to repeat the extraordinary performance of the late 1990s call for more modest growth assumptions.
- Sales tax revenues will decline due to the steady shift in consumption from goods to lightly taxed services, and the difficulty of collecting taxes on Internet-related transactions.
- Excise taxes will not keep pace with overall economic growth.
- Spending in many states will be increasingly dominated by the cost of Medicaid growth.
- The federal budget outlook has deteriorated dramatically, resulting in federal proposals to substantially cut state and local grants. The reduction in federal grants is the main reason why the fiscal outlook for states currently shows a potential average budget shortfall of 5.7% instead of 3.4% as reported in the 2002 analysis.
Projected conditions vary widely across states, depending on economic and demographic forecasts and the typical revenue and spending structures of each state. Figure 2 shows projected state and local deficits as a percentage of revenues in year eight (2013).
All 50 states show potential revenue deficits, ranging from 0.5% in New Hampshire to 12.9% in Wyoming. Of the 10 states with the largest projected deficits, five (Nevada, Tennessee, Texas, Washington, and Wyoming) do not have an income tax. Of the four states with the next largest potential deficits, two (Florida and South Dakota) also do not have an income tax.
Wyoming, the state with the largest projected deficit, is an anomaly. One of the few states that has shown a robust economy in recent years, its large projected deficit results primarily from its heavy reliance on federal revenues, which are projected to decline an average of 3.3% per year in real per-capita terms.
The model assumes that all states will absorb these reductions in revenue proportionally, though federal revenues may be cut in ways that do not fall evenly across states. Displaying the Figure 2 data geographically (see Figure 3) shows that northeastern states in general fare better than the U.S. as a whole, while southern states fare worst.