A new report from Pew Charitable Trusts shows revenue growth in most states is below inflation after two years of abundant tax receipts
By RUDI KELLER
Missouri Independent
Missouri’s general revenue has lagged behind inflation for two years in a row. And with that gap widening, the next few months could determine whether state revenue will see a year-over-year decline for the first time in more than a decade.
“September is a good sort of bellwether one for us, because that’s where we get quarterly payments from both individuals and corporations,” Dan Haug, Gov. Mike Parson’s budget director, said in an interview with The Independent last week. “There’s not a lot of significant due dates in July and August, so we try not to even really look at what trends are until we get through the end of September.”
Through Friday, general revenue receipts are down more than 3% compared to the same period in fiscal 2024.
Revenue grew 2.74% in fiscal 2023, while inflation was calculated at 3% by the federal Bureau of Labor Statistics. In fiscal 2024, which ended June 30, revenue grew 1.47%, while inflation was again pegged at 3%.
Missouri isn’t the only state suffering from sluggish revenue growth, according to a recent report from Pew Charitable Trusts. During the COVID-19 pandemic, many states — including Missouri — enjoyed a surge of revenue that drove new spending and tax cuts.
Missouri enjoyed double-digit revenue growth for two years, a trend that ended in early 2023. Nationally since the start of fiscal 2023, the report states, state government revenues have fallen below inflation rates and below the growth trend seen before the pandemic. That is the first time in 40 years that has happened outside of an economic recession.
“There’s less fiscal flexibility, but it’s unclear whether states will be really under strain or not, but it’s going to be more difficult than before,” said Alexandre Fall, a senior associate with Pew who was the main author of the report.
As they wrote this year’s budget in the spring, the Republican-led legislature tried to limit ongoing general revenue spending to the anticipated revenue of $13.2 billion. But even after Gov. Mike Parson vetoed $1 billion, the budget anticipates spending $15.1 billion in general revenue, dipping into surpluses accumulated during the surge in 2021 and 2022.
House Budget Committee Vice Chairman Dirk Deaton, a Republican from Noel, said lawmakers must continue to limit ongoing spending to new revenue.
“If revenue is lower in the future we will have to look carefully at core spending items to make sure the state budget is on a sustainable path and Missouri is well positioned to balance the budget year after year,” Deaton said.
State revenue was down in the early part of fiscal 2024 but ended up with modest growth, Deaton noted.
State Rep. Peter Merideth of St. Louis, the ranking Democrat on the Budget Committee, said future legislatures should commit to meeting state needs instead of hanging on to surpluses. Merideth is not returning to the House due to term limits.
Any spending cuts tied to the flow of revenue, rather than to the state’s total available resources, will fall heavily on education programs, Merideth predicted.
“We will cut education further,” he said. “Maybe it’s on the transportation line, or maybe it’s somewhere else, and we will cut higher education because those are about the only two slightly discretionary places that the legislature has to cut with large sums of money.”
Sitting on a surplus
On June 30, the general revenue fund held $4.8 billion, down $960 million from the balance a year earlier. That is still the third-highest year-end balance in state history.
Some of that money is committed to multi-year building projects, such as a $300 million mental health hospital in Kansas City, but most of it is unencumbered.
Other surplus money was stashed elsewhere. The state is holding $2.4 billion transferred from general revenue for major projects including rebuilding Interstate 70 and expanding the state Capitol Building.
Another $1.8 billion was held in accounts that can be spent like general revenue.
The question for lawmakers and state officials is how to spend from surplus funds without exhausting them, said Liz Farmer, a fiscal policy writer at Pew.
“States are spending down balance dollars at a rapid rate,” Farmer said.
The budget presented by Parson in January anticipated an unencumbered general revenue balance of $1.9 billion on June 30, 2025.
Along with major projects, in the past two years lawmakers have used the surplus to fund smaller items in their districts. Parson has vetoed many of those items as he cut $550 million from the budget in 2023 and $1 billion approved this year.
Future lawmakers need to resist the urge to earmark funds for their district, Merideth said. Stagnant or declining state revenue should mean extra funds are reserved for filling shortfalls in important programs.
“We have a surplus to work with in the short term but we haven’t hit an economic crash, which at some point will happen in the future,” Merideth said. “That’s when we’re going to be in real trouble.”
During the recession that began in 2008, revenues fell from about $8 billion annual to $6.7 billion a few years later. Haug, who has worked for both the legislature and the executive branch, said the state is in good shape in case of a recession.
“We’ve got a very healthy fund balance to help us get through a minor downturn, if there is one, although I’m not sure that there even will be one,” Haug said. “We’re in a lot better spot to weather this kind of stuff than we’ve been probably in any of the time I’ve been here.”
There are structural changes in the cost of state government that are permanent, thanks to the surge of revenue.
The pay of every state worker hired before the beginning of 2022 has increased at least 20.7% under pay raise plans proposed by Parson. Some workers have received much larger percentage boosts, from a longevity pay plan approved this year, increases in night pay for workers in prisons, mental health hospitals and other custodial institutions and approval of a minimum salary of $15 an hour for all state jobs.
With state agency staff vacancy rates averaging more than 10%, the cost of running the state will go up as workers are added.
“Increased state employee pay and salaries, as well as permanent tax cuts, were two very popular policy choices that were made across states and were made in Missouri,” Fall said. “But now that we’re seeing all this excess revenue kind of pull back, and states are seeing decreased flexibility, it’s unclear what comes next.”
Missouri has passed two large permanent tax cuts, with income tax rate cuts enacted in a special session in 2022, and a bill exempting Social Security benefits from state income tax in 2023.
Together, that legislation will reduce state revenue by $1 billion or more annually. The next step in the phased-in tax cut passed in 2022 will take effect on Jan. 1, cutting the top income tax rate to 4.7%.
Those cuts will generate economic activity that will sustain revenues, Deaton said.
“Missouri has made very clear through our tax policy we are more interested in growing the bank accounts of the people as opposed to growing the amount of monies coming to Jefferson City,” he said.
With a new governor coming into office in January and new legislative leadership, tapping the surplus could be a temptation.
“Whoever is sitting in that governor’s mansion and whoever is sitting in the budget committee chair will make a significant difference and it’s hard to predict,” Merideth said.
Revenue picture
In the last full fiscal year before the pandemic, the Missouri general revenue fund took in $9.6 billion. In the fiscal year that ended June 30, the total was $13.4 billion, 1.47% more than in the previous year.
Two of the main sources of state revenue — personal and corporate income taxes — saw a decline in collections in fiscal 2024. So far this year, the decline in revenue received so far has extended to sales tax collections.
The surge in revenue coincided with the highest inflation rates in 40 years and sales tax growth led the way, thanks to consumers spending federal pandemic relief aid along with higher wages and prices.
There is no evidence in the Missouri economy that would show the current decline in sales tax collections is anything but temporary, Haug said.
“People may be pulling back a little bit temporarily to pay off debt and things like that, but eventually the fundamentals are what’s going to drive it,” Haug said.
Missouri added 62,400 jobs from July 2023 to July 2024 and personal income grew at an annual rate of 6.7% in the first quarter of the year. State GDP is up 1.6% on an annual basis and inflation, while slowing, continues, with prices nationally about 2.5% higher than a year ago.
“Long term, that’s what’s going to drive our revenues, and I think that’s still what’s going to drive our revenues,” Haug said.
With the end of pandemic restrictions, consumers are spending more on non-taxed services and travel, Farmer said, as well as substituting cheaper goods when they make purchases.
Missouri estimates its revenue each December for the remainder of the fiscal year and the coming year. A longer horizon for budget outlooks would make the state better prepared for possible trouble, she said.
“That is one of our key benchmarks for state fiscal health, and something that could be really helpful for assessing what these impacts on personal income tax and those cuts look like for the state down the line for revenue,” she said.
A longer-term outlook may be helpful, Deaton said, but experience shows that the short-term estimates aren’t particularly accurate.
“There have been times they were very close and other years when estimates missed badly,” Deaton said. “The further you extend out, the greater the margin of error.”