States Face Tougher Budgets in 2024 Thanks To Declining Revenue

By FOCUS, A Leonine Business

In recent years, thanks to pandemic-era revenue surges fueled by federal spending and inflation, state governments have enjoyed relatively loose budgets. With this new budgetary flexibility almost every state, except for Alaska and Nevada, has enacted some kind of broad-based tax cut over the past three years. As we step into 2024, however, the financial landscape is undergoing significant changes. The revenue boosts are receding, and in some states, dipping into negative numbers. The National Association of State Budget Officers anticipates that state tax cuts will result in $13.3 billion less in general revenue this year than what states would have collected without the tax cuts. While revenues are falling, spending continues to increase. Enacted budgets for 2024 call for a 6.5 percent increase in general fund spending over the previous year. These more limited funds are forcing states to make tougher decisions about their budgetary priorities.

Despite a $100 billion surplus just years ago, California now projects a budget deficit of $68 million. Maryland’s legislative staff recently projected a daunting $761 million budget deficit in 2025. In Arizona, the state government is on the brink of a $400 million shortfall in its 2024 fiscal year. And Minnesota’s budget office warns that a projected $2.4 billion surplus could fall into a $2.3 billion shortfall by the 2026-27 fiscal years. In his state of the state address, Vermont Republican Gov. Phil Scott directly addressed the budgetary issues facing his state, saying, “With historic one-time federal aid ending, another large increase in our pension obligation and last year’s spending decisions catching up to us, we are back to where we were several years ago with difficult decisions to be made,” Governor Scott said, “For many of you, this will be the first time you’ll work on a budget without hundreds of millions of dollars in surplus. For others, it’s deja vu.

One silver lining, however, is that states have a cushion against declining tax revenues, boasting a record $407 billion in savings and cash balances at the end of 2023, up significantly from $111 billion in 2020. As states navigate the evolving financial landscape in 2024, the juxtaposition of recent surpluses and current deficits highlights the dynamic nature of fiscal management. Tough decisions lie ahead as states strive to maintain essential services and address budget shortfalls. The ability to adapt and innovate in these uncertain times will play a crucial role in determining the financial resilience of each state. FOCUS will continue to monitor the legislative developments of state budgets in the coming year.