Revenue Growth: More Tortoise Than Hare: The new year brings new budget challenges as state revenue growth trudges slowly along.

• Author: MacKellar, Erica
• Position: BUDGETS

In the last decade, while state programs continue to grow at a fast pace, state general fund revenues have grown only modestly, recovering far more slowly than in previous recessions. State general fund revenues increased only 1.9 percent in FY 2017, and are projected to grow 3.9 percent for FY 2018, according to an NCSL survey last October.

K-12 education and Medicaid together account for about two-thirds of state budgets annually, and both are consistently the fastest growing program areas. In FY 2018, total state funding for Medicaid is expected to increase 7.2 percent.

These, and other rising health care costs, and the unknown future of the Affordable Care Act, the Children's Health Insurance Plan and federal tax reform made budgeting especially tough for states.

Uncertainty over federal policies will continue to be a concern in state legislatures this year, particularly in Maryland and Virginia and other states with economic ties to Washington, D.C. States are waiting to see how federal tax policies will change, and the potential effects on state budgets. Currently, 15 states allow taxpayers to deduct state and local income taxes when calculating federal taxable income, which is a key target in the congressional tax reform plan.

Although some state budgets would not be drastically affected in the short term by a change in federal policy, ambiguity and a lack of direction could be challenging in the long term, because slow revenue growth leaves little margin for budgeting error.

Estimating Revenues, No Easy Task

All these challenges are compounded by the difficulty of estimating revenue, which may have contributed to the large number of legislatures--10--that had to go into overtime to adopt state budgets last year. In many states, both personal income tax and general sales tax collections have become more difficult to predict. Typically, as income grows, people purchase more and this drives sales tax growth. But that trend may be shifting--and it could be a long-term problem. The population of the United States is aging rapidly, and as people grow older, their consumption patterns change. Add to that the...