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Economic Forecasts

States Bask in Cold Cash

So long, lean years. Today many state governments enjoy big (and growing) surpluses. But don't expect sizable tax cuts.

You may know Cheyenne, Wyo., as a rodeo capital, not a financial center. But the biggest thing in town -- the state government -- can barely count all its money. With a $1.2-billion surplus, Wyoming will beef up its state university, establish new scholarships, create a trust fund to help families of National Guard members and reservists serving overseas, add $35 million to its fund for wildlife and still set aside $500 million for when hard times return.

Wyoming's riches come from the boom in oil, gas and coal, which generate royalties and severance taxes. But not only energy-producing states are flush. Nationally, state tax revenues are up 13% from a year earlier, including an 18% rise in personal-income-tax collections. Dozens of states now enjoy surpluses. In 2005, just five states made midyear budget cuts, compared with 37 in 2003. What's next? Will governors ask legislatures to cut taxes? Build roads and schools like crazy? Or simply keep the money?

The top priority will be to replenish rainy-day reserves, says Nick Johnson, who studies state finance for the Center on Budget and Policy Priorities. In 2000, states' reserves equaled 10% of budgets. That's now 3%, so states will save much of their windfalls. In Georgia, says Robert Giacomini, of the state budget and planning office, the state will hold on to $200 million of its $300-million surplus and use the remaining $100 million for education.

You'll see proposals for cuts in broad-based taxes like sales and income this year. But few will pass, says Nick Samuels, senior fiscal analyst with the National Association of State Budget Officers. His reasoning: demographics. States are increasingly pressed to pay pensions, retiree health benefits, medicaid and now part of the medicare prescription-drug plan. Knowing this, if lawmakers cut taxes deeply and "permanently," their next move would be to ask for fresh tax increases. That's certainly no way to get reelected.


Some of the money is already gone. Certain states may be committed or obligated to repay temporary debts or undo bookkeeping gimmicks from recent lean times. South Carolina state economist Robert Martin says much of an extra $411 million will go to "fix a long-term accounting problem that resulted during the recession." South Carolina legislators get to parcel out just $100 million of the bundle.

State finances are as volatile as they are unpredictable. During the last recession, revenues fell almost as fast as they're now rising. States hiked taxes all kinds of ways and raised countless fees. Hello to the fiscal roller coaster.