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Is Your Governor Making the Grade? Part II

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State fiscal balances as a percent of expenditures.

State fiscal balances as a percent of expenditures. Source: The Fiscal Survey of States, Spring 2016

My friend Chris Edwards has done an exhaustive analysis of the trends in state spending, and the performance of the governors of each state. Apart from his ranking of the governors, what struck me in his report “FISCAL POLICY REPORT CARD ON AMERICA’S GOVERNORS 2016,” was the frightening trend of increased spending in state budgets. Edwards writes:

Figure 1 shows state general fund spending since 2000, based on data from the National Association of State Budget Officers.2 Spending soared between 2002 and 2008, and then it fell during the recession as states trimmed their budgets.3 Spending has bounced back strongly in recent years, growing 4.1 percent in 2013, 4.6 percent in 2014, 4.1 percent in 2015, 5.6 percent in 2016, and a projected 2.5 percent in 2017.

A key driver of state spending growth is Medicaid. This giant program pays for health care and long-term care for 67 million people with moderate incomes.4 The program is funded jointly by federal and state taxpayers. It is the largest component of state budgets, accounting for 26 percent of total spending.5

Medicaid has grown rapidly for years, and the Affordable Care Act of 2010 (ACA) expanded it even more.6 For states that implement the ACA’s expanded Medicaid coverage, the federal government is paying 100 percent of the costs of through 2016, and then a declining share after that. As the federal cost share declines, state budgets will be put under more stress. But aside from the federal portion of Medicaid, the state-funded portion of the program is also growing quickly and stressing budgets. State-funded Medicaid spending grew 6.0 percent in 2015 and an estimated 8.3 percent in 2016.7

On the revenue side of state budgets, policymakers have been enacting a mix of tax cuts and tax increases. Overall, the states enacted a modest net tax cut in 2014 and 2015, but they swung to a net tax increase in 2016.8 Cigarette tax increases have been common, with a dozen states enacting them since 2014.9 Gasoline tax increases have also been common, with about half the states enacting them since 2013.10

There is also a trend toward reductions in individual and corporate income tax rates. There have been substantial rate cuts in Arizona, Indiana, Kansas, Maine, New Mexico, New York, North Carolina, North Dakota, Ohio, and Oklahoma in recent years. In some states, the revenues from income tax cuts have been partly offset with revenue increases from higher retail sales taxes.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com