Are State Budgets Prepared For Lower Tax Revenues?
Authors & Contributors
U.S. Municipal Bond Team
State tax revenue growth has been exceptionally robust in the past few quarters. Although some of the growth is attributable to healthy economic expansion, a significant portion is due to the impact of the Tax Cuts and Jobs Act (TCJA) passed in December 2017. As the positive impact of the TCJA on state tax revenue fades, states now face decelerating revenue growth and, in some cases, declining revenues. While the incremental revenues from tax reform may seem unequivocally credit positive for the state sector, further analysis shows that there are some potential risks associated with increased revenues. Higher revenue volatility created by the TCJA, an expected slowdown in economic growth, uncertainty created by the federal government shutdown, and increased spending has created a challenging environment for states’ budget management. These considerations take on more urgency as many states are beginning their fiscal year 2020 budget negotiation process.