By Catherine Hubbard, CCH Washington Staff Writer
Despite an improving economy, some states still face an uphill battle to recover from the lingering effects of the recession of 2001, according to a survey released May 3, 2004 by the National Governors Association (NGA) and the National Association of State Budget Officers (NASBO).
The Fiscal Survey of States shows that 26 governors are considering net tax and fee increases for fiscal 2005 totaling $5.4 billion. The largest proposed increases are in fees ($1.5 billion), sales taxes ($1.4 billion), and cigarette and tobacco taxes ($1.4 billion). In addition, state Medicaid programs continue to stress the budgets of nearly half of the states, despite efforts to curtail costs.
Governors are also proposing $2.5 billion of other measures that enhance general fund revenue but do not affect taxpayer liability, such as amnesty programs. On the other hand, the governors of Florida, Montana, Pennsylvania and Wisconsin have proposed tax and fee decreases totaling $266 million.
Yet unlike the last several years, most fiscal 2004 revenue collections have met budgeted expectations. "While state revenue collections during the past three years have been dismal, the picture is brighter as states end fiscal 2004," said the report.
Specifically, 11 states report revenue lower than projected, 17 say it is on target and 22 say revenue exceeded budgeted estimates. Regarding specific revenue sources, the sales tax was 2 percent higher than budgeted estimates, the personal income tax was 6 percent lower and the corporate income tax exceeded projections by 4.4 percent, according to the report.
Governors also expect fiscal 2005 expenditures to rise 2.8 percent from 2004, well below the 26-year average of 6.2 percent. However, the expenditure growth is up from the anemic 0.6 percent increase in fiscal 2003, which was the smallest increase in the previous 20 years. "We have just come through three very difficult years, a period that has put a tremendous strain on states," said NGA Executive Director Raymond C. Scheppach.
While revenues are more closely meeting estimates, overall general revenue collections--particularly the personal income tax--are not as strong as they were at the height of the Internet boom, a situation states are still adjusting to, said the report.
In addition, NGA and NASBO found:
- Proposed changes in the sales tax for fiscal 2005 would result in a net increase of $1.4 billion. Twelve states propose increases, including Virginia, which would increase taxes on non-food items and lower taxes on food (a $625.9 million increase) and New York, where a sales tax holiday and a surcharge to fund public safety would result in a $441 million change. Three states, Florida, Oklahoma and Pennsylvania, propose sales tax decreases.
- Twelve states propose a total of $64 million in personal income tax increases. For example, Kansas would impose a 5 percent surcharge (a $97.5 million increase), while Arkansas would impose a 3 percent surcharge (roughly a $64.5 million increase). Seven states propose net personal income tax decreases, including Oklahoma, which would exempt capital gains and increase exemptions for retirees (an $18.8 million cut) and Montana, which would reorganize rates (a $15.8 million decrease).
- Seven states propose corporate income tax hikes netting $400.2 million. Most of this amount ($223 million) reflects Illinois, which would close a variety of loopholes.
- Twelve states propose cigarette and tobacco tax increases totaling $1.4 billion, and two--Connecticut and Nevada--recommend alcohol tax increases, netting $20.8 million. Michigan would raise cigarette taxes by 75 cents per pack, reaping $295 million, while Missouri would boost its per pack tax by 55 cents and raise other tobacco products by 20 percent for a $222.4 million increase.
- Illinois proposes a $74 million increase in motor fuels taxes, including the elimination of an exemption for certain types of vehicles.
- Twenty states propose a total of $1.5 billion in increased fees. They include New York ($578 million), California ($306 million) and New Jersey ($232 million). Fees frequently are associated with motor vehicle and other types of licensing.
- Twelve states recommend changes in other taxes for fiscal 2005 for a net $524.8 million increase. They include Nevada ($345.5 million), New Jersey ($152 million), Michigan ($94 million) and Alabama ($50 million). Other taxes frequently include personal property taxes, provider taxes and levies on hotels and rental cars.
Medicaid
Medicaid continues to exert pressure on state budgets, with nearly half of the states experiencing budget shortfalls in fiscal 2003 and 18 states expecting shortfalls the following year, according to the survey.
All states have enacted cost containment measures in fiscal 2002 through fiscal 2005. Yet even with cost containment and current federal relief, 23 states experienced Medicaid shortfalls in fiscal 2003, including New York ($1.8 billion), Tennessee ($722.5 million) and California ($722.5 million). As a percent of total Medicaid spending, the shortfalls ranged from less than 1 percent to 16.4 percent of program costs, averaging 4.6 percent, according to The Fiscal Survey of States.
In addition the survey shows that 18 states expect shortfalls in the current fiscal year, including New York ($828 million), Florida ($435 million) and Missouri ($207 million). The combined amount of the shortfalls in fiscal 2003 and fiscal 2004 totals nearly $7 billion.
States estimate their share of Medicaid will grow 4.6 percent in fiscal 2004. Federal spending on the program is expected to grow 11.7 percent. Conversely, states estimate growth rates much higher in fiscal 2004--12.1 percent in state funds as opposed to 3.9 percent in federal funds. This shift in spending is due to the temporary increase in the Federal Medical Assistance Percentage (FMAP) of 2.95 percent that is in effect from April 2003 through June 2004 as part of the federal fiscal relief package.
The temporary change in the matching rate provided $10 billion in fiscal relief to states during fiscal 2003 and fiscal 2004. States have used the funds in a variety of ways to assist in Medicaid programs. About three-fourths of the states used them to avoid, minimize, or postpone Medicaid cost containment measures and/or to resolve a shortfall in the Medicaid budget.
Medicaid expenditures make up 21 percent of all state spending, while spending on all health care functions constitutes about 30 percent of state spending, according to the report. Medicaid costs are expected to continue to outstrip growth in state revenues into the future, growing between 8 percent and 9 percent each year, according to the report.
The Fiscal Survey of States, released on May 3, 2004 by the National Governors Association and the National Association of State Budget Officers.
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Added to the news on April 29, 2004.
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