States Question What To Do With Surging Tax Revenue

By Greg Allen

Published April 29, 2013 at 4:00 AM EDT

Across the country, state budgets are back in the black after years of belt-tightening and spending cuts. From California to Florida, in nearly every state, the economic recovery has produced a surge in tax revenue.

For governors and state legislators, that's produced a new question: how to spend the money.

The past three years have not been easy ones for elected officials. Nearly every state requires them to produce a balanced budget. And with declining revenue from sales, property and income taxes, that has meant big spending cuts.

But with the economy in slow recovery, tax receipts have improved. And governors like Florida's Rick Scott find they now have good news to report: "We have a projected budget surplus for the first time in six years."

State economists say Florida is on track to take in $3.5 billion more in revenue than it did last year. Like all states, Florida faces a lot of uncertainty. Will the economy continue to improve? How much will it need to spend on health care? What impact will budget sequestration have on the flow of federal money to the states?

But even with all those caveats, Scott Pattison of the National Association of State Budget Officers says, states have hit an important milestone.

"This will be the first year in which states will be back to their pre-recession budget levels," Pattison says.

Florida — like many states — is putting much of the surplus into education. After cutting education spending by more than a billion dollars in his first year, Gov. Scott is proposing a $2,500 across-the-board raise for teachers. Scott, by the way, is running for re-election next year.

One way many states balanced their budgets over the past few years was by tapping their rainy-day funds. Now, states like North Carolina and Michigan are putting money back in — too much, according to some critics.

In Michigan, for example, Democrats and local officials want to tap some of the millions earmarked for the fund by Republican Gov. Rick Snyder.

But Pattison says while nearly all states are seeing more revenue, some have underfunded pension plans that will quickly claim any additional money.

"And a state like Illinois is really looking at a situation like that," Pattison says, "where they might see some improvement in the revenue picture, but on the expense side — pension liability — that's actually growing faster."

In states like Florida, California and Arizona, the improving housing market has helped. In the Midwest, the resurgence in the auto industry has made all the difference.

In Ohio for example, two years ago Gov. John Kasich and the Republican-controlled Legislature had to plug an $8 billion deficit.

Paul Beck, a professor emeritus of political science at Ohio State University, says that meant less money for schools and local government.

"They were pretty massive cuts," Beck says. "Local governments and school districts were basically having to tighten their belts considerably. There was a substantial downturn in government jobs in Ohio, particularly at the local level."

Now that Ohio has a budget surplus, the discussions between Kasich and lawmakers aren't about restoring spending to schools and local governments. Most of the money is earmarked for tax cuts.

Montana, Indiana and Oklahoma are a few of the other states also using their surpluses to fund tax reductions.

But in no state is the budget turnaround more dramatic than in California. Two years ago, Gov. Jerry Brown was looking at a $25 billion budget deficit. This year, Brown's budget increases spending by 5 percent.

The improving economy helps. But the key factor was a referendum approved by voters last year that increased taxes to help fund education.

"It gave us breathing room," says Sherry Bebitch Jeffe, a senior fellow at University of Southern California's Price School of Public Policy. "A lot of it, as always, is a bet on the economy. But it's only a temporary fix. And so you're going to see another cycle of boom and bust at some point."

In California and other states, the question is how long this current growth will last. Because of the recession, states and local governments laid off nearly three-quarters of a million workers. If growth continues and budgets keep improving, the hope is that some of those workers may be rehired.