State Net Capitol Journal – May 14, 2012

State Net Capitol Journal – May 14, 2012

Budget & Taxes

STATES' FISCAL HEALTH CONTINUING TO IMPROVE: State fiscal conditions are continuing their slow and mostly steady improvement, according to the National Conference of State Legislatures' Spring 2012 budget update. For the first time since the start of the Great Recession, some states are expecting to end fiscal year 2012 with a budget surplus, NCSL's survey indicated. And fewer states have faced mid-year shortfalls. But budget officials remain cautiously optimistic about their states' fiscal health.

In all, 29 states and the District of Columbia are projecting an aggregate budget surplus of $9.1 billion, which works out to only about 1.4 percent of states' total general fund appropriations. But four states - Alaska, Indiana, Montana and Wyoming - are projecting surpluses of 10 percent or more.

Only nine states have reported budget shortfalls since the start of the fiscal year. And in four of those states, the gap was less than 1 percent of the general fund budget. But three states - California, Louisiana and Pennsylvania -had gaps of between 1 percent and 5 percent, and two states - Alabama and Washington - had gaps of over 5 percent.

Revenue performance over the first eight months of the fiscal year has been a key factor in the states' improved fiscal condition. But some revenue categories, such as sales taxes and corporate income taxes, have performed better than others, like personal income taxes, which is a cause of concern for some.

"Even though the economic outlook in the states is improving, tax collections across all categories remain uneven," said NCSL's Executive Director William Pound. "And that's one reason state lawmakers are still uneasy." (NATIONAL CONFERENCE OF STATE LEGISLATURES)

TOBACCO BACKED BONDS IN JEOPARDY: Following the landmark multi-state tobacco settlement in 1998, dozens of cities, counties and states issued bonds, backed by annual payments from the tobacco companies, so they could get their hands on the billions of dollars they had coming to them sooner. The ability of the bond issuers to meet their financial obligations to bondholders relies on the maintenance of a certain payout level from the tobacco companies. Initial projections forecast that the tobacco payments would decline by about 1.8 percent per year as cigarette sales slowed. But tobacco sales have slowed much faster than that, and the payments have been falling by about 4.1 percent per year.

That has already forced at least three states - California, Ohio and Virginia - and Nassau County in New York, to tap special tobacco-bond reserves to pay their bondholders, which some analysts consider to be a technical default because the bondholders are basically being paid with their own money. And Richard Larkin, director of credit analysis at Herbert J. Sims & Company, calculates that at the tobacco payments' current rate of decline, full-blown defaults will begin in 2024, starting with a $350 million shortfall in Ohio that year and proceeding with billions of dollars in defaults in California, New Jersey, Virginia and New York City in the years after that. (NEW YORK TIMES)

BUDGETS IN BRIEF: Backers of a November ballot measure to raise CALIFORNIA's sales tax from 7.25 percent to 7.5 percent and hike income taxes on residents earning $250,000 or more per year began submitting 1.3 million in signatures - well over the 800,000 needed to qualify the proposal - to county officials last week. Gov. Jerry Brown (D) is counting on the tax plan to help close the $9.2 billion deficit projected for the fiscal year that begins July 1 (BLOOMBERG BUSINESSWEEK). • KANSAS lawmakers approved a $3.7 billion tax-cut bill that slashes personal income taxes, does away with income taxes altogether for many small businesses and slices about a half-cent off the state sales tax. The bill now goes to Gov. Sam Brownback (R), who said he is prepared to sign it but would like to see other alternatives (KANSAS CITY STAR). • MARYLAND lawmakers will convene in special session on Monday (5/14) to consider legislation to raise income taxes on the state's top wage earners to pay for public services. The session is expected to last two or three days (WASHINGTON TIMES).

- Compiled by KOREY CLARK

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