State spending to jump again this fiscal year

Governors and state lawmakers plan to spend almost 7% more on average this fiscal year than they did last year as tax collections grow, according to a survey of government officials released Friday.

Tax revenues have come in higher — sometimes dramatically higher — than state budget writers expected for two consecutive years. So far this fiscal year, which for most states started July 1, tax collections are still beating expectations. Only California has collected less money than anticipated, according to the survey conducted by the National Association of State Budget Officers.

The 7% increase in general fund spending for fiscal 2023 follows an 18.3% increase last year, the highest growth rate since NASBO started collecting data over 30 years ago. State general fund spending typically comprises the bulk of state spending on services such as public schools, health care and corrections departments.  

Many states ended the 2022 fiscal year with enormous surpluses. 

“In the aggregate those collections exceeded projections by a little over 20%,” said Kathyrn White, director of budget process studies at NASBO. “Which is pretty extraordinary.”

State leaders plan to spend more on every program area this year, according to the NASBO survey. Thirty-one states enacted tax cuts for fiscal 2023. Thirty-one states increased state employee pay, with across-the-board raises ranging from 1% in Nevada to 10% in Arizona. 

At the same time, the record surpluses are fueling an unprecedented increase in rainy-day funds, reserved for a fiscal crisis. The typical state’s rainy-day fund is expected to equal about 12% of its general fund in 2023, NASBO found, up from 10.3% in 2021. 

“Both rainy-day-fund balances and total balances have continued to grow significantly and are both at all-time highs,” White said. Total balances are the sum of rainy-day funds and budget surpluses. 

“Those really are helping states ensure they’re as prepared as possible for any possible economic downturn,” she said.

States have also strengthened their fiscal positions by using excess cash to pay down debt, bolster pension systems and finance construction projects, White said. 

Tax revenues boomed in recent years for many reasons, including rising stock prices, a spike in oil prices and economic stimulus from federal COVID-19 aid.

High inflation has also increased both the amount of money collected and the amount spent by states. 

Fiscal 2022 spending grew by just 9.6% when adjusted for inflation, NASBO found. The group doesn’t yet have inflation-adjusted data for fiscal 2023, which will end next summer for most states.