Taxes and Budgets:

Key Trends from the

States
Sujit M. CanagaRetna
The Council of State Governments
Southern Legislative Conference

Presentation Before the

Association of Capitol Reporters and Editors (ACRE)
Philadelphia, Pennsylvania
August 4, 2007

Five Main Parts

I.

Where are States on the Fiscal Front?

II.

Structural Issues Confronting State Finances

III.

Looming Expenditure Categories

IV.

Strategies Deployed/Proposed to Fund these

Sizable Expenses

V.

Bright Sparks on the State Economic Front

I. Where Are States?

In FY 2007, total year-end balances
(ending balances and amounts in
state rainy day funds) stood at
$50.4 billion or 8.2 percent of
expenditures
In FY 2006, total year-end balances
stood at $62.1 billion or 10.9
percent of expenditures

I. Where Are States?

In FY 2007, total revenues

Exceeded original budget projections in
27 states
On target in 14 states
Below target in 9 states

In FY 2006, all states either met or

exceeded their revenue projections

I. Where Are States?

In FY 2007, revenue collections from the

three major taxes were 2.4 percent higher
than original estimates. Specifically,
Corporate income taxes were 10.9
percent higher
Personal income taxes were 2.4 percent
higher
Sales taxes were 0.6 percent higher
In FY 2007, only 3 states (MI, RI, WI) were
forced to reduce their enacted budgets by a
total of $170 million

I. Where Are States?

In FY 2008, revenues in Governors

recommended budgets are projected
to be 3.3 percent higher than the prior
year
In FY 2008, total year-end balances
are projected to decline still further to
$38.7 billion or to 6 percent of
expenditures

II. Structural Issues:

Faltering Revenues

II. Structural Issues:

Faltering Revenues

Virginia = $200 million to $300 million shortfall in

current FY 07-08 biennium;
Alaska = $500 million gap in FY 09;
Florida = $1.5 billion combined shortfall in FY 07 & 08;
Arizona = revenues short of projections for FY 08;
Maryland = $1.5 billion deficit in FY 08;
California = $764 million in FY 07 and $1.4 billion in FY
08;
Illinois = $874 million shortfall in FY 08;
Massachusetts = $1 billion gap in FY 08;
Michigan = at least $1.6 billion in FY 08; and
Rhode Island = nearly $400 million in FY 07 and 08

II. Structural Issues:

Service-Based Economy

Economic activity in the U.S. has moved

markedly to a service-based economy
U.S. economy continues to be powered by
service sector: In first six months of 2007,
without the benefit of 815,000 service jobs,
the economy would have had a net loss of
106,000 jobs
However, state sales taxes, often the
primary source of revenue for states, relies
on a manufacturing-based economy

II. Structural Issues:

Service-Based Economy

Federation of Tax Administrators (FTA) tracks state

sales taxes on services such as:

Business Services
Personal Services
Admissions/Amusements
Fabrication, Repair and Installation
Utilities
Computer Services
Professional Services
Other

The latest FTA report lists a total of 168 taxes

on services

II. Structural Issues:

Service-Based Economy

Six states (DE, HI, NM, SD, WA, WV)

tax more than 100 services
One state (AK) taxes a single service
and another (OR) does not tax a single
service
23 states tax between 10 and 50
services
19 states tax between 51 and 100
services

II. Structural Issues:

Revenue Erosion from
e-Commerce

II. Structural Issues:

Revenue Erosion from e-Commerce

By 2008, state and

local government
revenue losses from
taxable e-Commerce
transactions are
estimated to range
between $21.5
billion (low) and
$33.7 billion (high)

9
8
7
6
5

Low
High

4
3
2
1
0

TX

TN

FL

NV

AZ

MS

III. Looming
Expenditures: Healthcare

In FY 2006, according to a July 2007 federal

CMS report, total Medicaid spending amounted
to $304 billion
Wyomings $421 million was the lowest and New
Yorks $44.7 billion was the highest
Medicaid spending is approximately 22 percent
of total state spending and provided care for
more 62 million low-income individuals
Medicaid spending is estimated to increase by
5.8 percent in Governors recommended budgets
for FY 2008 with state funds increasing by 7.0
percent and federal funds increasing by 4.9
percent

III. Looming
Expenditures: Healthcare

Elderly population in every state will grow

faster than the total population (3.5 times
faster)
Seniors will outnumber school-age children in
10 states in the next 25 years
26 states will double their populations of
people older than 65 by 2030
FL, PA, VT, WY, ND, DE, NM, MT, ME and
WV will all have fewer children than elderly

III. Looming
Expenditures: Public Pensions

Every element in our nations retirement architecture

Social Security/Medicare; Corporate and Public
Pensions; Personal Savingsface serious challenges
From 2005 to 2030, the 65-and-over population will
nearly double, to 71 million; its share of the
population will rise to 20 percent from 12 percent
Declining worker to beneficiary ratio:
1950 = 16.5 to 1
Today = 3.3 to 1
In next 40 years = 2 to 1

III. Looming
Expenditures: Public Pensions

2004 50-State SLC Report 73 percent or 68

of the 93 plans unfunded
2007 (Feb) Standard & Poors report mean
funded ratio declined from an average of over
100 percent in 2000 to 81.8 percent in 2005
2007 (March) Wilshire Report actuarial
funding ratio declined from 103 percent in
2000 to 88 percent in 2006
2007 (July) NASRA Report average funding
level at 85.8 percent with a cumulative
unfunded liability of $380.9 billion

III. Looming Expenditures:

Public Pensions

GASB Statement 45 requires that state

and local governments account for and
report the annual cost of OPEB (Other
Post-Employment Benefits) mostly
health care -and the outstanding
obligations and commitments related to
OPEB in the same manner as they do for
pensions

III. Looming Expenditures:

Public Pensions (OPEB Estimates)

AL = $10B
AK = $500M
CA = $40B - $70B
CO = $925M
DE = $3B
MD = $20B
MA = $13B
MI = $30B

NJ = $58B
NY = $47B - $54B
NC = $14B
NV = $1.75B - $4.4B
RI = $550M
UT = $540M
VA = $5B
VT = $2.59B

III. Looming
Expenditures: Prisons

FY 2007 state corrections budgets amounted to nearly

$38 billion
The country's prison and jail population has never
been higher, having risen 2.8 percent from July 2005
to July 2006 to 2.2 million, according to recent federal
statistics
Estimates contend that the nations prison population
will grow by another 192,000 in the next five years
Chronic prison overcrowding has corrections officials in
a number of states (HI, AL, CA, AZ) looking
increasingly across state lines for scarce prison beds,
usually in prisons run by private companies

III. Looming
Expenditures: Education
Educational Expenditures 1996-2005 (constant dollars)
$450,000,000
$400,000,000
$350,000,000
$300,000,000
$250,000,000
$200,000,000
$150,000,000
$100,000,000
$50,000,000
$0
1996

1997

1998

1999

2000

2001

Year

2002

2003

2004

2,005

III. Looming
Expenditures: Transportation

In order to maintain U.S. global

competitiveness, experts emphasize the
need for an expanding and efficient
transportation network
Enhancing our nations transportation
network involves substantial
enhancements to all transportation
modes including surface (highways,
bridges), rail, ports and airports
U.S. infrastructure network is aging

III. Looming
Expenditures: Transportation
Many states have already signaled huge transportation
shortfalls, including
Georgia ($7.7 billion shortfall in coming years)
New Hampshire (35 years and $4.5 billion to complete a
10-year plan to construct and repair bridges and
highways)
Nevada ($3.8 billion highway construction shortfall)
Oregon stands to lose $1.7 billion in income annually due
to reduced transportation improvements
The city of Chicago needs $6 billion to bring its subways
into a state of good repair
Texas (state Department of Transportation reports a $86
billion gap over next generation)
Louisiana (road needs backlog totals $14 billion)

IV. : Strategies Deployed/

Proposed: Leasing State Assets

Highways (NJ, IN, PA, VA, TX, Chicago)

Lotteries (CA, IL, IN, IO, MD, NJ, TX)
Student Loan Portfolios (MO, IL)
Liquor Stores (PA)
Naming Rights for Transit Stations (CT)
Commuter Railroads (South Bend, IN/Chicago, IL)
Airports (NY, IL)
Advertising Space on Bus Shelters, Newsstands,
Garbage Cans (NYC)
Naming Rights to Stadiums (San Francisco,
Boston)

IV. Strategies Deployed/

Proposed: Leasing State Assets

(Pocahontas Parkway, Virginia)

First new construction project

under Public Private
Transportation Act of 1995
Original Financing:
$353 million Toll Revenue
Bonds
$18 million SIB Loan
$9 million Federal funding
Transurban and DEPFA
(Australian consortium) made a
proposal to VA DOT to acquire
the right to collect tolls, operate
and manage the Pocahontas
Parkway for profit
Transurban & VA DOT negotiated
a 99-year agreement for project

IV. Strategies Deployed

/Proposed: Pursuing Toll Roads

The U.S. Department of Transportation encouraging

states to consider toll roads as an option to generate
funds for their transportation needs
Practically every state in the country is considering
either expanding their current toll roads, increasing
toll rates or introducing new toll roads
Texas is one such state and has an agreement with
Spanish toll road builder Cintra for a possible toll
project (Texas 121 turnpike in Collin County), where
Cintra pledged to pay the state $2.1 billion upfront
and about $700 million over 49 years for the right to
build and operate the 26-mile toll road

IV. Strategies Deployed/

Proposed: Expanding Gaming

State Lottery Sales and Profits

Sales = $52.6 billion (FY 05); $57.4 billion (FY 06)

Profits = $16.4 billion (FY 05); $17.1 billion (FY
06)

Commercial Casino Gaming Revenue

$30.29 billion (2005); $32.42 billion (2006)

IV. Strategies Deployed/

Proposed: Expanding Gaming

(2006 Commercial Casino Tax Revenues to States)

State

Amount

Colorado

$108.4 million

Illinois

$830.2 million

Indiana

$833.7 million

Iowa

$289.4 million

Louisiana

$527.8 million

Michigan

$349.9 million

Mississippi

$301.6 million

Missouri

$424.6 million

Nevada

$1.013 billion

New Jersey

$508.8 million

South Dakota

$13.3 million

IV. Strategies Deployed/

Proposed: Hiking Tobacco Taxes

As of July 1, 2007:

Overall State Cigarette Tax Average =

107.3 cents per pack
Major Tobacco States Average = 33.5
cents
Other States Average = 117.1 cents per
pack

In 2007, 11 states hiked their cigarette

tax rates

IV. Strategies Deployed/

Proposed:

Hiking Cigarette Taxes (in 2007)

AK (by 20 cents; tax

now $2.00)
AZ (by 80 cents; tax
now $2.00)
CT (by 49 cents; tax
now $2.00)
DE (by 60 cents; tax
now $1.15)
HI (by 20 cents; tax
now $1.80)

IO (by 100 cents; tax

now 1.36)
IN (by 44 cents; tax
now 99.5 cents)
NH (by 28 cents; tax
now $1.08)
SD (by 100 cents; tax
now $1.53)
TN (by 42 cents; tax
now 62 cents)
TX (by 100 cents; tax
now $1.41)

V. Bright Sparks:
Auto Industry in the South

U.S. auto industry is a study in stark contrasts:

On the one hand, the Big Three (General Motors,
Chrysler and Ford) domestic automakers
domiciled mostly in the Midwest hemorrhage
vast amounts of cash and battle a range of
structural problems
On the other hand, an increasing roster of foreign
automakers located mostly in the South
thriving financially and generating a panoply of
positive economic benefits, locally and regionally

V. Bright Sparks:
Auto Industry in the South

Mercedes Vehicles Manufactured at

Plant in Vance, Alabama

V. Bright Sparks:
Auto Industry in the South

Alabama (Mercedes; Honda; Toyota; Hyundai;

Isuzu)
Georgia (Kia)
Kentucky (Toyota)
Mississippi (Nissan; Toyota)
South Carolina (BMW)
Tennessee (Nissan)
Texas (Toyota)
Virginia (Volvo)
West Virginia (Toyota)

V. Bright Sparks:
Alabamas Record

German steelmaker ThyssenKrupp announced a 3,500acre, $3.7 billion facility that will employ 2,700 workers in
Mobile County
EADS, the European parent company of Air Bus, will
establish a $600 million, 1,000 direct worker plant in
Mobile to build the KC-330, the U.S. Air Force's latest
aerial refueling aircraft
National Rail Car, the leading Canadian rail-car company,
announced a $350 million manufacturing facility in
Colbert County that would create 1,800 jobs
Mercedes plant in Vance, Alabama has a $6 billion annual
economic impact along with generating nearly 42,000
jobs

V. Bright Sparks:
Technology (Bio and Info)

California - $3 billion over 10 years on stem cell research

projects
North Carolina - $1.5 billion project to convert a 350-acre
site in a former mill town to a cutting-edge bio tech center
Florida - $310 million in funds to lure Scripps to open a
facility in Palm Beach County
New York - $600 million for stem cell research
Connecticut - $100 million over the next decade on stem
cell research
New Jersey and Illinois also promoting stem cell research
Texas $3 billion - over the next decade on cancer research
Arizona - $3 billion Intel plant with 1,000 new, high-paying
jobs for computer engineers and technicians

V. Bright Sparks: Ports

Top 10 U.S. Ports by Cargo Volume, 2005
Rank
1
2
3
4
5
6
7
8
9
10

Port/State
South Louisiana, LA
Houston, TX
New York/New Jersey
Huntington, WV,OH,KY
Long Beach, CA
Beaumont, TX
Corpus Christi, TX
New Orleans, LA
Baton Rouge, LA
Texas City, TX

Cargo (Tons)
212,245,241
211,665,685
152,131,674
83,888,903
79,857,710
78,886,680
77,646,945
65,875,811
59,293,661
57,839,378

V. Bright Sparks: Ports

Top 10 N. American Ports by Container
Traffic, 2006
Rank
1
2
3
4
5
6
7
8
9
10

Port/State
Los Angeles, CA
Long Beach, CA
New York/New Jersey
Oakland, CA
Vancouver, BC
Savannah, GA
Tacoma, WA
Hampton Roads, VA
Seattle, WA
Charleston, SC

TEUs
8,469,980
7,289,365
5,092,806
2,391,598
2,207,730
2,160,113
2,067,186
2,029,799
1,987,360
1,968,474

V. Bright Sparks:
Ports and Automobiles
(BMWs await loading at the Port of Charleston, SC)

V. Bright Sparks: Film Industry

Hollywoods new Backlot: The U.S.?

States enacting various incentives to attract the
motion picture industry
Louisianas 2002 landmark legislation
Industrys sizable economic impacts:

Louisiana: output of $1 billion (2005)

New Mexico: financial effect of $428 million (FY 2006)
California: economic activity of $42.2 billion (2005)
Georgia: economic impact of $448.3 million (2006)
Florida: $3.9 billion industry (2007)
North Carolina: $300 million in spending (2006)

V. Bright Sparks:
Regional Alliances

States working in alliance on major

economic development projects:
GA/SC = Jasper County Port Authority
MS/FL/GA = Pledge of support to AL in
securing ThyssenKrupp steel plant
DE/PA/MD/NJ = Regional technology
cooperative

Thank You

Taxes and Budgets:

Key Trends from the
States
For more information, please contact
Sujit M. CanagaRetna
404/633-1866
or
[email protected]
www.slcatlanta.org