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Twenty-Five States Face Revenue Shortfalls in 2018

Twenty-five states are currently facing a revenue shortfall, which is a marked improvement over our report from last year, when 31 states were in deficit. New additions to this year's list include Arizona, Florida, Kentucky, Minnesota, and New Jersey. Colorado, Delaware, Massachusetts, Mississippi, Montana, New Mexico, Virginia, and Washington have improved enough to drop off our 2018 list. 

While this reports seeks to list every state that will have a fiscal deficit, there is considerable variability in just how large those deficits are. In some instances, such as Rhode Island and Vermont, the deficit is small enough that very little legislative action will be needed to resolve it; whereas other states, such as Illinois and New York, may have to consider significant changes to solve their fiscal problems. 

Hanging over all of these forecasts is the uncertainty created by federal tax reform, with wide variation in how the new legislation will affect state finances. For example, a Montana study found that the state could lose up to $123 million; Wisconsin lawmakers fear that the federal changes could lead to higher state income taxes; Missouri is expecting only minimal impact, though it is unclear whether it will be a gain or loss; Colorado lawmakers can expect a windfall of up to $340 million in the new year; Tennessee economists say that the the bill should give the state at least a modest boost. This will create a significant wrinkle as lawmakers make their budget plans for the next cycle. 

As we've noted before, compiling a list of budget deficit states is a complicated process. There are three main reasons for this: (1) the data is not centralized within individual states; (2) data and terminology are not consistent between states; and (3) the data is often misleading. We have tried to make our findings as transparent as possible by linking to our information sources. 

Please note: three states (Maryland) did not have updated revenue forecasts as of publication and we are therefore unable to definitively determine whether they are facing a revenue shortfall. 

States with expected revenue shortfalls are shown in the map and explained in detail below.

Alabama
Although the exact revenue picture is somewhat murky, Alabama’s fiscal outlook suggests a deficit coming into the new legislative session. While the state is expected to carry over $128 million from its last budget, a judicial requirement to increase funding to the Department of Corrections, uncertainty over the Children’s Health Insurance Program (CHIP), and flagging revenue collections could be more than enough to drive Alabama deep into the red.

Alaska
Despite repeatedly convening special sessions to find solutions to the state's ongoing budget problems, Alaska is still facing a projected $2.7 billion budget deficit. A solution to the state's budgetary imbalance has eluded lawmakers for years, but any permanent solution would require fundamental reforms to state taxation and the sacrosanct Permanent Fund. Governor Bill Walker attempted to address both issues this year, but failed to gather a sufficient consensus for a long-term solution.

Arizona
Arizona's $104 million budget deficit will place business taxation front and center during the upcoming legislative session. 2018 marks the final phase-in of a 2011 corporate tax cut that many economists speculate is behind the state's lagging revenues. Governor Doug Ducey (R) has made it clear that he does not think that now is the time to consider increasing taxes on businesses. He has categorically dismissed suggestions that the state delay the currently scheduled cut and instead has pledged to cut corporate taxes further. Since he is up for reelection, Ducey will be at pains to deliver on this promise, but it is complicated by the fact that he has also said that he will increase K-12 spending. This could lead to a fight over state spending to determine, in the words of one legislator, "Who's going to bleed the least."

Connecticut
During a speech before the legislature, Governor Dannel Malloy (D) announced that a spike in income tax collections means that the state will have $900 million more than they had projected, but this will not cure the state's fiscal problems. While the state's projected deficit is only $223 million, because the $900 million windfall is composed of one-time revenue state law mandates that only $10 million can be used to fill-in the budget hole. To close it, the governor has proposed a mitigation plan that suggests a range of options that included renewing efforts to raise the sales tax, increasing the hotel tax, hiking cigarette taxes, cutting municipal aid, and closing the old state house. If the deficit number continues to climb, increasingly desperate revenue measures will be needed to bring it under control.

Florida
Florida is facing a difficult fiscal future as lawmakers will have to contend with the long-term impacts of Hurricane Irma's devastation and revenues that are not keeping pace with social spending levels. Coming into this year, short-term revenues were looking good as the state expected to realize a modest surplus, but those plans changed after hurricane season caused billions of dollars of damage. Over the longer-term, budget experts have been sounding the alarm that current revenue streams are straining to contain the costs of a growing Medicaid population and the needs of the education system. All told, budget analysts predict that the state will face a $1.6 billion deficit by 2020. This could complicate the politics for Governor Rick Scott's (R) plans for an extended back-to-school tax holiday and to exempt clothes and school supplies from the sales tax.

Illinois
Despite passing its long-awaited budget deal earlier this year, Illinois' revenue woes are far from over. The state is staring down a deficit of well over $6 billion. Lawmakers tried to address the state's systemic revenue problems by hiking corporate income tax rates, but this was only a drop in the bucket. Illinois' deficit is fueled by overspending, a ballooning pension system, overly optimistic revenue forecasts, and general mismanagement. This problem was years in the making and will likely take even longer to resolve, but we can expect lawmakers to consider an array of drastic solutions when they return to Springfield in the coming weeks.

Indiana
After consistently missing revenues every month so far this fiscal year, Indiana is facing a modest $140 million revenue shortfall for the coming fiscal year. So long as it remains at this level, lawmakers say they don't have reason to be overly concerned because relatively small spending tweaks can resolve it. The hole is largely attributable to under-performing corporate tax revenues. Democrats are spinning this as an indictment of Republican's push to slash business taxes, while the House speaker chalks it up to businesses engaging in tax planning and shifting the timing of their liability.

Iowa
Sluggish revenue growth and the prospect of having to repay $144 million into the reserve fund means that Iowa lawmakers will have to make some spending adjustments in the upcoming session. October revenue projections showed that receipts were trending below the levels that legislature used to craft its budget and those lackluster numbers were confirmed in the December edition. Department of Management Director Dave Roederer estimates that the state may have to cut between $45 million and $90 million. While not an insurmountable hurdle in a $7.2 billion budget, it may constrain lawmakers from pursuing more expansive policy agendas (such as the GOP's efforts to eliminate the income tax) and will feed into a number of partisan talking points.

Kansas
After years of shortfalls, Kansas has started to see some positive revenue growth this fiscal year, but it may not be enough to satisfy the state's demands. Most pressingly, the Kansas Supreme Court ruled that the state's school funding formula did not live up its constitutional requirements and would require further investment. The court did not specify what dollar figure would satisfy it, but hinted that it would be hundreds of millions of dollars. In addition to the need for more education spending, the state highway fund will also require significant attention after being raided to satisfy previous budgetary shortfalls.

Kentucky
Although revenues have been trending up, Kentucky must resolve its dire fiscal circumstances as it crafts its biennial budget. State economists have pegged the state's budget deficit at $156 million, but that number balloons up to $2 billion when the state's pension crisis is factored in. Governor Matt Bevin had hoped to pass pension reform in 2017, but push-back against his original plan stalled his agenda. Heading into the regular session, lawmakers will have to address the state pension fund along with their rest of their legislative business, which will lead to a far messier process that could hamper the governor's push to tax reform.

Louisiana
In 2016, Louisiana addressed its $2 billion budget deficit by passing a slate of tax changes including, most prominently, a temporary rate hike and expansion of the sales tax. Those temporary measures are set to expire next year, leaving lawmakers with a budget hole valued at more than $1 billion. Insiders on the ground suggest that lawmakers are going to return to Baton Rouge in February to resolve the hole, but there isn't any definitive plan yet on how they will do that.

Minnesota
While they are not taking the issue lightly, Minnesota lawmakers are saying that the state's $188 million budget deficit is no cause for alarm. The state's economic indicators are still trending in the right direction, but this deficit has caused some anxiety about how long those trends will hold. In the short-term, this deficit could also hamper the governor's legislative agenda, which includes expanding pre-K access.

Nebraska
Nebraska's revenues have consistently fallen below estimates so far this fiscal year, causing state economists to project a $173 million biennial deficit. Lawmakers were already forced to make reductions to state spending levels this fiscal year and forgo reforming the state's property tax code. After the news of next year's deficit, Governor Pete Ricketts (R) called on state agencies to again begin planning for cutbacks. So far lawmakers are still hopeful that tax reform can happen in 2018, but the political calculus has been muddied significantly.

New Jersey
There is a good deal of uncertainty about New Jersey's economic future, and Governor-elect Phil Murphy (D) is concerned. In a letter to Governor Chris Christie (R), Murphy spells out his concern that the Garden State could be facing a $1.8 billion deficit in the coming fiscal year (though he admits that this is an pessimistic estimate). Christie has pushed back against his successor's accounting, saying that many of the assertions are wildly off base. If Murphy's budget deficit does materialize, it will hamper his ambitious legislative agenda, which includes pension reform and free college program. However, it could justify his campaign pledges to increase taxes on business and wealthier individuals.

New York
It's unclear exactly how big the New York budget deficit is going to be next year, but it's there and it's going to be significant. In an October interview, Governor Andrew Cuomo (D) said his state was facing a $4 billion shortfall that spurred on by sagging revenues and anticipated cutbacks to federal programs. In November, a conservative think tank released it's own accounting that pegged the state's deficit at $6.8 billion. The governor has not refuted this new higher estimate, so it seems likely that it's a good reflection of the depth of New York's fiscal predicament.

North Dakota
There is still some uncertainty about what North Dakota's revenue picture will look like in the coming year, but current estimates predict that the state will face a deficit of $400 to $700 million. Lawmakers believe that they have the tools to resolve the shortfall, but some worry that it could result in another round of unpopular tax hikes. Rising oil prices would ease the path toward a balanced budget.

Oklahoma
After a lawsuit invalidated Oklahoma's first attempt at new taxes to support its 2017 budget, lawmakers have been unable to come to a consensus on a long-term funding plan. After a series of special sessions, lawmakers have been able to ensure funding to a few essential services, but a final deal remains elusive. Looming over this continued struggle, however, is the fact that economists predict that after they put one budget to bed, a new budget crisis will pop up. Forecasts suggest that Oklahoma will face a deficit of between $425 million and $600 million, mostly owing to the fact that previous budgets have been so reliant on one-time funding mechanisms. When the legislature does come back, it will have to decide whether cut spending further (which the governor opposes) or seeking new sources of revenues (which conservative legislators oppose).

Oregon
Oregon continues to struggle with mounting pension fund expenses, which are contributing to a $1.7 biennial deficit. A task force has provided recommendations that include creating a matching fund, overhauling the state tax code, and a general curtail on state employee benefit increases. The deficit problem may be further compounded by a bill which, if passed, could decrease revenue generated from the state's low-income health insurance coverage program.

Pennsylvania
While Pennsylvania has improved its fiscal situation from the daunting deficit it faced last year, lawmakers will still have to contend with a projected $1 billion shortfall when they return to Harrisburg. The state plans to continue its borrowing practice, and increase revenue from gambling, including online gambling, to offset its expenses. Pennsylvania also hopes to obtain $1.5 billion in tobacco revenue that has, until recently, been tied up in a lawsuit.

Rhode Island
While Rhode Island should be able to close its $60.2 million budget deficit without undue fiscal strain, it is serving to complicate the political landscape. Between state agencies delaying hiring for a number of open positions and a few other as yet unspecified cutbacks, the gap should be resolved, but even still some members of her party in the House worry that Governor Gina Raimondo (D) is not taking the situation seriously enough.

South Dakota
While South Dakota's upcoming $33.7 million budget deficit is not overwhelming, it will be enough to restrict the legislature's fiscal maneuverability. Governor Dennis Daugaard (R) has already told state workers not to expect a raise and is instructed officials to start looking for ways to cut back on spending. Despite these cost saving measures, the governor says that South Dakota is moving the right direction fiscally.

Texas
Texas is still calculating damages from Hurricane Harvey, and recovery efforts could cost as much as $1 billion. Whatever the cost, recovery will exacerbate Texas' mounting deficit. Texas will not meet for a regular legislative session in 2018, but if the situation deteriorates, a special session may be necessary.

Vermont
Vermont expects to face a $45 million deficit for the coming fiscal cycle. State workers' pay and other public service-related expenses continue to grow while personal and corporate taxes have failed to meet estimates. Additionally, education expenses may require the state to levy a 7- to 9-cent increase on property taxes.

West Virginia
It appears that West Virginia has weathered the worst of its economic crisis. The projected $11 million deficit is considerably less than in prior years as the state has collected additional severance taxes, which Governor Jim Justice (R) attributes to recovery in the coal sector. With that said, optimistic economic projections may be skewing revenue expectations, thus impacting the budget down the road.

Wyoming
The Wyoming Legislature is considering ways to reduce its $770 million budget deficit by reshuffling where it spends its revenue. Schools and other public services anticipate a reduction in state funding. However, the state is hoping to redirect revenue accrued from its vast natural resources to lessen the expected cuts' impact. Additionally, although Wyoming ranks first in being the most "tax-friendly" state, residents may see an increase in certain taxes to cover other state public services.

Updated Jan. 10, 2018: This report has been updated to reflect announcement of new revenues in Connecticut and the fact that neither Arkansas nor Missouri will have budget deficits in 2018. 

Tae Aderman contributed to this post.

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