2017 State Policy Review: Budgets

This is the first in a series of posts wrapping up the top state issues of 2017 and previewing what's ahead in 2018.

At the start of 2017, MultiState found that 31 states were facing budget deficits, a reflection of the trouble that states continue to have recovering from the Great Recession. Over the past several years, states have faced slow, but usually steady revenue growth. However, it has not always kept pace with the costs of expanding state services in a climate of intense political polarization.

This year, the need to make hard trade-offs led state legislators to engage in prolonged, acrimonious budget negotiations. While most states were able to turn their spending plans in on time, a record 11 states missed their budget deadlines and continued debating into the summer and beyond.

Politics and Policy Differences Take Toll on Budget Debates

The reasons for these delays varied from state to state, but the root cause in many legislative chambers was political brinkmanship. The Pennsylvania House, for example, stonewalled any attempts to impose new taxes until the Senate and the governor were forced to acquiesce to avert fiscal calamity. Things were so bad in Minnesota this year that the governor threatened to defund the legislature. Finally, Illinois continued to define political cynicism as the governor and speaker steadfastly refused to deal with one another; a resolution was only reached after a bitter back and forth and veto override.

Political theater was not the primary cause of budget troubles in every state, though. Several states were wrestling policy differences like Wisconsin's debate over highway funding, Kansas' push to repeal Governor Sam Brownback's tax cuts, and Oregon's attempt to reform business taxation.

Budget Trouble Remains in Oklahoma

While nearly all of these states ultimately passed a long-term spending plan, Oklahoma remains the only fiscal holdout. After blowing past the end of their regular session, lawmakers in Oklahoma City breathed a sigh of relief when they were finally able to pass a budget using rainy day funds, agency spending cuts, and a new $1.50 fee on cigarettes. But that relief was short-lived when the Oklahoma Supreme Court threw out the cigarette tax hike, citing improper legislative procedure. Legislators passed a tax-increase-free “cash and cuts” budget, but Governor Mary Fallin (R) struck it down, saying it would do too much harm to essential state services. Lawmakers are set to return to the Capitol on December 18, but it's still unclear how they plan to move past their differences.

What to Expect in 2018

This year was a difficult time for state finances, but there are at least modest signs that 2018 will be a little easier. In its most recent report, the Rockefeller Institute of Government found that state revenue growth has been relatively strong compared to the recent past, though revenues were down in 12 states. Furthermore, the report's authors argue that there is evidence to suggest that 2016 revenues were depressed as taxpayers moved returns to 2017 to take advantage of tax reform.

But there is still trouble on the horizon. Economists are still debating how federal tax reform may affect state finances. Additionally, oil-producing states could continue to struggle because the Organization of the Petroleum Exporting Countries has decided to extend production limits, at least temporarily.