April 24th Afternoon State Tax Update

This past week, state policymakers made continued progress in their fiscal policy responses to the coronavirus outbreak. Major trends and developments are recapped below.

New Revenue Forecasts

Several states—including California, Delaware, Kansas, and Maryland—recently issued revised revenue forecasts that show serious shortfalls in the current and next fiscal years.

In California, the Department of Finance has projected the state will need to spend more than $7 billion responding to the pandemic, including on emergency medical supplies and personal protective equipment. Under the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act, the state will receive $5.25 billion in aid to help cover those expenditures. But just as spending needs skyrocket, California’s taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. collections are expected to plummet. The California Legislative Analyst’s office in a Senate hearing told legislators the state could experience a short-term budget shortfall of as much as $35 billion and a longer-term impact of as much as $85 billion. For sake of comparison, the budget Gov. Gavin Newson (D) submitted in January proposed allocating $153 billion to the general fund and boosting savings by $17 billion.

In Delaware, the Economic and Financial Advisory Council’s April revenue forecasts for FY 2020 and FY 2021 are a combined $689 million below the forecasts issued just last month. Similarly, in Kansas, the Consensus Estimating Group’s April forecasts show FY 2020 and FY 2021 revenues are expected to come in a combined $1.272 billion below the projections made in November, or 10.8 percent below previous projections for FY 2020 and 5.8 percent below projections for FY 2021. Similarly, Maryland’s comptroller has announced the state will likely see a revenue shortfall of approximately $2.8 billion for FY 2020, representing a nearly 15 percent decline in general fund revenue.

Most states do not have sufficient reserves to weather revenue shortfalls of this magnitude without significant spending reductions. This is especially true of the states that had been ill-prepared going into the Great RecessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. . While some states spent much of the 11-year recovery from the Great Recession bulking up their rainy day funds to prepare for the next economic downturn, many states were so caught off guard by the 2007-2009 recession that they spent much of the past decade merely recovering from that recession instead of preparing for the next.

As states look to close out FY 2020 with a balanced budget and finalize their budgets for FY 2021, they would be well-advised to reduce spending where they can now in order to prevent more painful cuts and tax increases from occurring a year or two down the road.

Budget Developments

Over the past week, both Arkansas and Virginia saw major developments on their budgets for the next fiscal year. In Arkansas, the House and Senate convened for their 2020 fiscal session, which was scheduled to last a month but will adjourn today after only two weeks. On April 16^th, the House and Senate finalized a $5.8 billion budget for FY 2021, spending approximately $205.9 million less, or 3.6 percent, than originally planned in accordance with recently revised revenue projections. Under this budget, most state agencies—except those directly responding to the pandemic—will see budget cuts of approximately 5 percent. Notably, the Arkansas budget sets aside $60 million into a Restricted Reserve Fund and allows certain budget cuts to be reversed if economic conditions improve and revenue collections exceed expectations.

On April 22^nd, the Virginia legislature convened for a veto session, and legislators approved most of Gov. Ralph Northam’s (D) nearly $2 billion in spending freezes over the next biennium (FY 2021 – FY 2022), as well as a four-month delay in a planned minimum wage increase. Also of note is a new, temporary excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. that was proposed by the governor in his budget amendments and approved by legislators. Specifically, the budget delays by one year a previously enacted ban on certain electronic “skill games” frequently found in bars and restaurants. In exchange for allowing restaurants and bars to continue operating these games for one year, the games will face an excise tax of $1,200 per machine per month starting in July, with revenue dedicated to a COVID-19 relief fund. Gov. Northam has said he will veto any legislation that attempts to further delay the ban on such skill games, which was initially set to take effect this July.

Plans to End Legislative Sessions

Three states have recently announced plans to end their legislative sessions. Arizona, after suspending its session multiple times in hopes of reconvening before tomorrow’s adjournment date, recently announced its legislative session will officially end May 1^st. Similarly, in Connecticut, legislative leaders have announced that the legislature will cancel the remainder of this year’s session, which had been scheduled to end May 6^th. In Arkansas, legislators sped through this year’s month-long fiscal session and will adjourn today at noon after only two weeks in session instead of the typical month. Both Arizona and Connecticut are actively planning to convene special sessions later this year.

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