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All Contents © 2020The Kiplinger Washington Editors
By David Payne, Staff Economist
| January 25, 2019Updated January 10, 2020
Most state budgets are in better shape now than they were before the last recession, thanks to steady growth in employment and the resulting rise in tax revenue. Many states have been socking away cash in rainy-day funds for the next recession, and about half of all states have enough on hand to tide them over in a typical downturn, such as the 2001 tech bust.
But many states will struggle when things go south for the economy, even in a moderate recession, which will surely happen eventually. The most vulnerable states have little savings, or they stand to see revenues fall steeply because they depend heavily on either income taxes or levies on energy production to fund their budgets.
These 10 states would have to either raise taxes or cut spending by more than 4% in the event of a typical recession. Is your state on the list? Take a look.
Reserve, revenue and budget data are from the National Association of State Budget Officers. Recession impact on state revenues calculated by Moody’s Analytics.
PERCENTAGE POINTS SHORT OF RAINY-DAY FUNDING NEED: 15
Go to Louisiana’s Full State Tax Profile
The Bayou State depends heavily on oil and gas revenues, so it could be hit harder than most states when a recession causes energy prices to fall due to lower demand.
The state’s reserves are only 4% of the state’s general fund, well short of the nearly 19% cushion that’s needed.
PERCENTAGE POINTS SHORT OF RAINY-DAY FUNDING NEED: 9
Go to Illinois’ Full State Tax Profile
The Prairie State’s reserves are tiny at 1.6%. A severe pension funding shortfall, a high level of debt, and perennial political budget gridlock are three of the challenges Illinois faces in trying to build its reserves.
PERCENTAGE POINTS SHORT OF RAINY-DAY FUNDING NEED: 7
Go to Arkansas’ full state tax profile
Arkansas has had a long history of not keeping fiscal reserves. The state began to build a reserve fund in 2016, but the fund is capped at around 3% of the budget.
Go to Kentucky’s Full State Tax Profile
The Bluegrass State is vulnerable because its reserve balance is low: just 3% of the state’s general fund. Kentucky’s state employees pension fund is only 16% funded, the lowest funding level of any large public pension in the country. This creates demands on future revenues, making it harder to build reserves.
Go to New Jersey’s Full State Tax Profile
In the Garden State, reserves are only 3% of the state’s general fund, and there are obstacles to increasing them: Public pensions are severely underfunded, and New Jersey pays the 4th-highest debt service ($4 billion per year), after California, New York and Illinois.
Go to Florida’s full state tax profile
At first glance it might seem the Sunshine State is doing okay with 8% reserves. However, Florida’s economy is likely more vulnerable to a national recession than most. The state’s economy depends heavily on tourism and housing construction, which can be cyclical.
PERCENTAGE POINTS SHORT OF RAINY-DAY FUNDING NEED: 6
Go to New Hampshire’s full state tax profile
The Granite State is proud that it has no income tax or general state sales tax. But that makes it hard to build reserves because the state has to cobble together revenue from multiple sources.
Corporate income tax accounts for a third of the state’s revenue, a quarter comes from taxes on restaurant meals, room and car rentals and telecom services, and 10% from the tobacco tax. Tax revenue from these types of sources would likely be hit hard in a recession.
Go to Pennsylvania’s Full State Tax Profile
Reserve balances are very modest at 1.5% of spending in the Keystone State, the lowest of any state. Public pensions are severely underfunded, which will make it tougher to allocate money to the state’s reserves. Making matters worse, Medicaid spending here is among the highest in the country, both on a per-person basis and as a percentage of total state government expenditures (36%).
PERCENTAGE POINTS SHORT OF RAINY-DAY FUNDING NEED: 5
Go to Rhode Island’s full state tax profile
The Ocean State’s economy has been sluggish in recent years, limiting tax revenue growth. Between spending on infrastructure and a state employees pension fund that is only 54% funded, building a reserve fund has not been a priority. The current reserve level of 5% isn’t terrible, just not enough to see the state through an economic downturn.
PERCENTAGE POINTS SHORT OF RAINY-DAY FUNDING NEED: 4
Go to Virginia’s Full State Tax Profile
Conditions in the Old Dominion have been improving, but reserve balances are still only 6% of the state’s general fund, and the state is particularly vulnerable because it relies on income tax for 60% of its revenue. Income tax revenue declines more during recessions than revenue from other sources.