State Surveys Confirm Widespread Revenue Shortfalls

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States are in the worst fiscal situation since World War II, caused in part by outdated tax systems, according to National Governors Association (NGA) executive director Raymond C. Scheppach. States "continue to have tax systems built for a manufacturing economy in the 1950s, not for the high-tech, international economy of the 21st Century," he said at a November 25, 2002 press briefing in Washington to announce the release of "The Fiscal Survey of States."

Scheppach said the explosion of health care costs also has led to overextended budgets. Making matters worse, he said, is a "collapse of capital gains tax revenues." Many states "rode up these revenues during the stock option period," he said adding that "this is a revenue that virtually collapsed." Even with economic recovery, structural problems in the tax system "will make states struggle for several years to come," he predicted.

The biannual survey, conducted by the NGA and the National Association of State Budget Officers, showed that in fiscal 2002 sales tax collections were 3.2% lower than originally budgeted, personal income tax collections missed states' targets by 12.8% and corporate income taxes were 21.5% lower than projected. Forty-one states collected less revenue in fiscal 2002 than they had planned for in their budgets, the associations said.

The NGA said it has supported past proposals that would have provided fiscal relief to states through a combination of social services block grants and increased federal Medicaid funds. "The fiscal relief package is an effective means of minimizing Medicaid cuts and would help offset the negative impacts of state budget cuts on the overall economy," Scheppach noted.

Revenues are failing to meet projected levels in two-thirds of the states, according to a survey released November 22, 2002, by the National Conference of State Legislatures (NCSL). More than half of the states surveyed reported that they face gaps in their fiscal 2003 budgets. Thirty-three states reported that revenue collections were below forecasted levels through October. "State revenue collections continue to be anemic," said the NCSL. In addition, 29 states said they have revised their revenue estimates for fiscal 2003. In 26 states, the revenue forecast was lowered, according to the report, "State Budget Update: November 2002."

"The revenue outlook for the remainder of the fiscal year does not reflect confidence for strong revenue recovery," said the NCSL. Twenty-nine states are concerned about revenue performance and nine are pessimistic. Meanwhile, eight states reported a stable outlook, and two said they are optimistic. The report, based on information collected from legislative fiscal directors in mid-November, covers the revenue and expenditure situation through the early months of fiscal 2003. Forty-six states began their fiscal year on July 1. The four exceptions are New York (April 1), Texas (September 1), and Alabama and Michigan (October 1). ("The Fiscal Survey of the States," National Governors Association, November 2002; "State Budget Update: November 2002," National Conference of State Legislatures.)

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