How a Budget Becomes a Law (State Budget Process 101)

Budgets are the beating heart of the state governmental process. They specify how money is spent, what taxes are levied, and where policy is headed in the future. They can inspire passionate debate or lead to years-long gridlock. Anyone looking to understand how politics work on the state level needs to come to terms with the norms and processes of budget negotiations.

Unfortunately, state rules on budget forecasting and revenue projections can be quite thorny, even though these economic predictors are the basis upon which all other policy discussions are based. Looking ahead to the 2024 sessions, it is helpful to run through some of the state budget process intricacies.

State Budgets 101

A state budget’s essential function is to allocate state resources, but because budgets are the rare state example of a must-pass bill, they can also play host to any other policy ideas that a coalition wants to push through. For example, Oregon Governor Kate Brown’s (D) 2019 executive budget proposal included a call for reforming state permitting, changing the procurement process, and creating educational audit standards. These ideas didn’t need a specific line item on a spreadsheet and were only tangentially related to the state’s fiscal health, but anything suggested by the governor could become part of the legislature’s final negotiated package.

State Budget Cycles: Annual Budget States vs. Biennial Budget States

Not all states operate on the same budgetary calendar. A little more than half of the states operate on an annual budget cycle, which means that lawmakers must craft a new spending plan every legislative session for the coming fiscal year. The remaining states operate on a biennial budget cycle, so lawmakers make spending plans that are intended to last for the subsequent two fiscal years. Although biennial budget states try to write two-year budgets, if revenues start to dry up before the original budget plan runs out, or if lawmakers simply decide to make a change, they can pass a supplemental budget.

Odd-year legislative sessions tend to be much busier and prone to big fiscal shake-ups for two reasons: (1) In odd years, all 50 states are wrestling with their finances, so the law of big numbers means that one of them is more likely to act aggressively, and (2) state elections typically don’t happen in odd years, and lawmakers often feel safer making big policy changes when they don’t have to face voters immediately after.

Budget Timing: When Does the Process Start?

The process for crafting a budget typically starts during the fall or summer before actual budget legislation is introduced, when the governor will ask every state agency to calculate how much money they believe they will need for the coming cycle. If the state predicts a tight budget year, the governor may ask the agencies to hold or trim their budget requests. 

Once the governor receives all of the agency requests, they will spend the following weeks or months crafting an executive budget request, which they will present to the legislature during either the State of the State address (click here to bookmark MultiState’s 2024 State of the State speech resource)  or in a specific budget address. These speeches typically happen at the very beginning of the session to set the policy agenda and fiscal parameters for the debates to follow.

Legislators have until the end of the fiscal year (typically the end of June or the beginning of July) to pass the budget, but they typically prefer to have it done before the end of the legislative session. Ideally, lawmakers set a steady schedule for their fiscal deliberations. Instead, like students cramming before finals, they often wait until the final weeks, days, or hours before the budget deadline and try to pass it in a rush. Because every state operates under a balanced budget requirement, if lawmakers blow past the budget deadline, they need to continue to negotiate and convene more sessions until they come to an agreement.

What Happens When A Budget is Missing or Late?

Whether caused by intramural bickering or a particularly daunting fiscal challenge, missing budgets are a tremendous source of stress for state lawmakers and can inspire rash, dramatic actions. When budget negotiations kick off at the beginning of the session, lawmakers often feel more comfortable sticking to their ideological guns. However, if things go long, the risk of a government shutdown or a downgraded credit rating increases. At that point, lawmakers will often become more willing to accept policies that had been dealbreakers previously. It was this pressure that motivated Louisiana to pass its temporary sales tax expansion in 2016 and persuaded Vermont Governor Phil Scott (R) to renege on his “no new taxes” pledge earlier this year.

Track State Tax Policy

Tax policy can be one of the most challenging areas for government affairs executives. MultiState’s team understands the issues, knows the key players, and helps you effectively navigate and engage. We offer a customized, strategic solution to help you develop and execute a proactive multistate tax legislative agenda. Learn more about our Tax Policy Practice.