States have increased their budgets after a one-time windfall drove tax revenues higher. Unfortunately, this one time revenue surge will likely become the new baseline and states will be forced to choose between sustaining their new levels of spending by increasing taxes next year and cutting spending. The better move for these states would have been funding a rainy day fund with the unexpected revenues. Stephen Moore explains the situation in The Wall Street Journal.
In total, state expenditures could rise by 5%-6% this year, according to an analysis by the investment research firm Strategas. That may not seem like a wild spree, but it’s running well ahead of the 2% inflation rate.
All of this is financed by an unexpected surge of tax revenues. State income-tax collections through April tax filing rose by 17% over last year, according to the Nelson A. Rockefeller Institute of Government (at the State University of New York, Albany).
But here’s the rub. In most non-oil states, revenues are up because tax-filers and companies cashed in one-half trillion dollars of capital gains, dividend and other income at the end of 2012—just ahead of President Barack Obama’s federal tax hike. This April’s increase in state revenues was in large part a one-time shot in the arm.