Budget boom times wane for Southwest states

Fiscal 2023 ended with higher revenue for most Southwest states, but shrinking growth rates indicate their coffers won’t continue to overflow as federal stimulus subsides and tax cuts erode collections. 

Texas wrapped up its fiscal year Aug. 30 with general fund revenue growth shrinking to 8.3% compared to fiscal 2022 when collections zoomed 26.4% higher than in fiscal 2021. Year-over-year growth in sales taxes, the largest source of state funding for the budget, slowed to 8.4% from 19.3% in fiscal 2022.

Diminished growth was expected as higher interest rates and reduced federal fiscal stimulus slowed the rate of inflation and real economic activity, Texas Comptroller Glenn Hegar warned in previous monthly revenue press releases.

That slowdown is being felt nationwide. 

“The extraordinary tax revenue growth of 2021 and 2022, fueled by higher inflation and federal pandemic stimulus, ended for many states in fiscal 2023,” Fitch Ratings said in a recent report.

It added that state budgets are well-positioned to address economic uncertainty. 

“A big reason is reserves, which states are adding to in greater numbers while paying down liabilities,” Fitch analyst Karen Krop said in a statement.

But states were also busy cutting taxes, which has reduced revenue. 

Total state tax revenue declined 5.4% in nominal terms and 10.7% in inflation-adjusted terms in fiscal 2023, which ended June 30 for most states, compared to fiscal 2022 as tax cuts and the stock market’s 2022 underperformance weakened collections, according to an Urban Institute report based on preliminary data.

“With their budgets buoyed by federal fiscal support and strong revenue growth over the past two years, a number of states issued rebates to taxpayers, passed tax rate cuts, expanded targeted income tax breaks, and established gas and sales tax holidays over the last two years,” Lucy Dadayan, the institute’s principal research associate, wrote in the report. 

She added nearly half of the states are projecting a decrease in overall tax revenue in fiscal 2024.

The Tax Foundation reported tax cuts took effect this year in several states, including Arkansas and Utah, which reduced income tax rates, while New Mexico continued to phase in a sales tax reduction and passed a one-time income tax rebate.

In Texas, fiscal 2023 tax revenue of $82.84 billion was ahead of projections made in January’s biennial revenue estimate, according to Hegar, whose spokesman said updates to the forecast will be released this fall. 

January’s forecast of a $32.7 billion surplus heading into the fiscal 2024-25 biennium spurred  lawmakers to pass a massive state-funded property tax cut that will be put before voters in November in the form of a constitutional amendment.

Arizona’s Joint Legislative Budget Committee reported general fund revenue fell 19.2% below fiscal 2022 collections at nearly $13.5 billion, which was 0.6% above the fiscal 2023 forecast for the enacted budget. Individual income tax collections had the biggest decline in the wake of phased-in rate reductions.

Utah’s preliminary fiscal year end data showed general and income tax fund collections of just over $11.5 billion. 

“This represents a year-over-year change of 0.3%, nearly flat against last year at this point, but still trailing behind the full-year consensus target rate of 1.2%,” a state revenue snapshot report said. 

More tax reductions are being sought in the face of revenue slowdowns.

Oklahoma Gov. Kevin Stitt is calling for the eventual elimination of the state income tax, which generated $5 billion in fiscal 2023. 

“Oklahomans know how to spend their money better than the government, so let’s leave more in their pocket,” he said in a statement last month. “With a record $1.3 billion in the rainy day fund and continued growth in our savings, there has never been a better time to cut taxes.”

The state ended fiscal 2023 on June 30 with gross revenue up 6% at $17.44 billion compared to a 15% jump in fiscal 2022. So far in fiscal 2024, collections were down 4.4% in July and 8.9% in August.

On Monday, Arkansas lawmakers began a special session called Friday by Gov. Sarah Huckabee Sanders, who outlined plans to further reduce income tax rates and create a $710 million reserve fund “to keep responsibly phasing out the income tax entirely.” 

“Tax cuts will be our top priority,” she told reporters. “Arkansas has Tennessee on one side and Texas on the other — both are zero income tax states making it harder sometimes for Arkansas to be competitive.”

The state reported its second-largest surplus totaling $1.16 billion at end of fiscal 2023. Net available revenue collections slumped nearly 4% at $7.185 billion, which was 1.8% above forecast. Individual income taxes, which generated $3.9 billion, were down the most at 6.1% due to tax rate reductions that were retroactive to Jan. 1.

The state’s latest general revenue forecast released in May projected fiscal 2024 collections would fall 6.1% below fiscal 2023.

Kansas completed fiscal 2023 with total tax collections of nearly $10.2 billion, which exceeded estimates by nearly $26 million and was 4.1% over fiscal 2022, which had topped fiscal 2021 tax revenue by 9.5%.

In April, Gov. Laura Kelly vetoed a bill to move to a flat income tax rate, which she said would cost the state $1.3 billion over three years.

The state’s fiscal 2024 budget adds $600 million to the rainy-day fund, bringing it to a record $1.6 billion. Improved finances and financial practices contributed to a positive outlook for Kansas’ bond ratings from S&P Global Ratings in February and a one-notch upgrade for state highway bonds from Fitch Ratings in July.  

Colorado’s fiscal 2023 general fund collections of $17.36 billion lagged the prior fiscal year by 2.5% and was 0.8% above forecast.

Bloomberg News

Fossil fuel industry volatility impacted energy producing states like Texas, where oil production tax revenue tumbled 6.8% in fiscal 2023 to $5.93 billion after increasing 84.4% in fiscal 2022. Natural gas production tax collections, which had soared by 185% in the prior fiscal year, fell 25% to $3.35 billion.

Growth in Oklahoma’s oil and gas gross production taxes slowed significantly. They ended fiscal 2023 up nearly 20% at a record $1.83 billion, compared to a jump of 102.8% that produced a then-record $1.53 billion in fiscal 2022. 

New Mexico, which recorded its highest oil production in state history in April, collected nearly $2.2 billion in oil and gas revenue in fiscal 2023, a 51.1% increase over fiscal 2022, according to an August consensus revenue outlook.

Legislation enacted this year is aimed at insulating the general fund from oil and gas volatility by increasing the amount of revenue transferred to the state’s Severance Tax Permanent Fund, where the money would produce investment income.