Many States See Increase in Tax Revenues

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Most states are enjoying big gains in tax receipts this year. So far, many states are being cautious about committing the newfound money to ongoing programs or passing permanent tax cuts that could haunt them when fortunes change.


On Fridays, our business report focuses on your money, more of which is ending up with your state government. Most states report that they're enjoying big gains in tax receipts this year, and for state governments, that is a welcome change from a couple of years ago. NPR's Scott Horsley reports.

SCOTT HORSLEY reporting:

New Mexico's state government found itself with so much money this fall, it decided to give some back. Every taxpayer in New Mexico received a one-time refund check last month. Finance Secretary James Jimenez says the state's coffers are still full enough to cut tax rates going forward.

Secretary JAMES JIMENEZ (State Finance Department, New Mexico): Our underlying economy is strong. The oil and gas prices are helping. We are a major producer of oil and gas, so that helps.

HORSLEY: Even states that are not enjoying a windfall of oil and gas royalties, like New Mexico, have seen big gains in income and sales tax revenues. North Carolina, for example, collected 11 percent more in taxes this past year. The governor's fiscal adviser, Dan Gerlach, hopes that will help the state regain the AAA credit rating from Moody's that it lost during the downturn.

Mr. DAN GERLACH (Fiscal Adviser, North Carolina): We are putting money back into our rainy day fund. We have restored the health of our balance sheet in large part. So we think we have taken a lot of steps to improve our situation because we met the challenges head on.

HORSLEY: Tax receipts are climbing sharply in virtually every state, except for those hit hardest by this year's hurricanes and Michigan, where the auto industry is struggling. Scott Pattison, of the National Association of State Budget Officers, says even with more money coming in, though, states still have some financial challenges left over from the early years of the decade.

Mr. SCOTT PATTISON (National Association of State Budget Officers): States are like the fellow who's been laid off who had to put less money into savings, may not have been able to put money in his pension and in the college fund for the kids, so there's some catch-up that states are going to have to be doing.

HORSLEY: And while revenues are increasing, Pattison says, states also face mounting expenses.

Mr. PATTISON: One of the biggest spending pressures for states continues to be health care, particularly Medicaid. Those costs have really been rising.

HORSLEY: Still, the budget picture is far better than it was in 2002 and 2003. Even after cutting tax rates and sending residents a rebate, New Mexico expects to have more than $600 million in new revenue next year. Finance Secretary Jimenez says the governor's warning lawmakers not to spend that money all at once.

Sec. JIMENEZ: Well, there's an expectation when you have a large amount of money to work with that you can meet everybody's needs and, of course, that simply isn't the case.

HORSLEY: Much of the new money flowing to states is from taxes on capital gains and corporate profits, which are notoriously volatile. Nicholas Jenny, who tracks state revenue for the Rockefeller Institute of Government, says states can count on that money only so long as the economy maintains its rapid growth.

Mr. NICHOLAS JENNY (Rockefeller Institute of Government): The real danger, of course, is that if the economy does slow down, that hits states, you know, very hard. It certainly did last time.

HORSLEY: So far, many states are being cautious about committing the newfound money to ongoing programs or passing permanent tax cuts that could haunt them when fortunes change. North Carolina's Gerlach notes it's often when the economy is in a downturn that citizens need help from their government the most.

Mr. GERLACH: Remembering the times that were tough is going to be important for state policy-makers not to get carried away as things get a little bit better.

HORSLEY: Scott Pattison of the Budget Officers group adds, states would be wise to celebrate their improving revenues with cheap supermarket wine rather than expensive Champagne. Scott Horsley, NPR News.

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