Missouri woes with finances years in making

JEFFERSON CITY, Mo. -- When economists and state budget analysts sat down in December 2000 for an annual meeting, they knew the economy was slowing but figured Missouri would do fine.

They projected 5.6 percent growth in general tax revenues for the 2002 fiscal year.

In retrospect, that was a whopping miscalculation.

Instead of growing, state tax revenues now are projected to be 4.4 percent below collections in fiscal 2001 -- the first decline in government revenues since at least 1976.

How could this have happened?

Obviously, the economy turned sour last year, the stock market plummeted and the Sept. 11 attacks stunned the nation.

But those factors alone do not explain state government's financial difficulties in fiscal 2002, which began last July and ends this June 30.

During the recessions of the early 1980s and early 1990s, for example, state revenues continued to grow. Based on that, economists who forecast state revenues figured continued growth for fiscal 2002.

Now they are trying to explain why they were so wrong.

"It seems there has been some sort of structural shift in how the economy is affecting our revenues," said Dan Haug, an economist in the governor's budget office.

Haug and several other economists point to some important developments during the past decade.

Taxing and Spending

During the economic boom years of the mid-1990s, legislators enacted nearly $1 billion in tax cuts while doubling state spending.

Missouri cut its sales tax on groceries, reduced corporate franchise taxes and granted numerous new income tax credits administered by the Department of Economic Development.

The cost of the tax credits alone has grown more than fivefold, although state officials say the credits return an equal or slightly greater amount of state taxes through business expansion.

Despite the tax cuts, the state's overall budget more than doubled from $9.2 billion in fiscal 1992 to more than $19.2 billion in fiscal 2002.

Part of that increase is due to a 333 percent explosion in the Medicaid health-care program for the poor and disabled, which is funded largely through federal dollars matched with state money. Medicaid now comprises almost a quarter of the state budget.

But lawmakers also doubled the funding over the past decade for public schools and state prisons.

The push for school funding followed a 1993 state court ruling that Missouri was shortchanging some school districts. Growth in prison spending was due partly to tougher sentencing laws that keep people in prison longer.

Now that tax revenues are down, the state is struggling to pay for its expanded programs and services.

"We told them three or four years ago, if we ever have a significant downturn in the economy, given what has happened to the state tax structure, the state would be in serious trouble. And that's where we are," said Ed Robb, director of the Economic Policy and Analysis Research Center at the University of Missouri-Columbia.

Robb is among the economists who calculate the revenue forecasts.

Playing the Market

During the past decade, more Missourians entered the rising stock market, so more people were affected when the market declined last fall.

The state, which had become increasingly reliant on capital gains taxes, was affected in turn.

According to a report issued Thursday, the state is collecting about 70 percent less in capital gains taxes in this fiscal year than it did the previous year -- the largest category of decline in the state's revenue portfolio.

In recent years, capital gains taxes had been steadily rising -- growing from 4 percent of the total individual income taxes paid in fiscal 1996 to 11 percent of that total in 2001.

Had state economists projected that capital gains taxes would drop dramatically, "people would've said you're crazy," said Brian Long, the budget director for Gov. Bob Holden.

Partly because of those factors, the amount of money owed to Missourians in tax refunds has tripled in the past decade, from about $380 million in 1992 to a projected $1.1 billion this year.

The increase this year alone is expected to be 19 percent.

A federal tax cut enacted last summer had a trickle-down effect on state income taxes. A federal stimulus package passed in March is expected to reduce state revenues by allowing businesses to claim more tax write-offs.

In Missouri, the average state refund for individual taxpayers is $309 so far this year -- up from $270 last year, according to the state Department of Revenue.

While a tax refund may be good news to most Missourians, it wasn't for Tom Kruckemeyer, the chief economist in the governor's budget office.

Kruckemeyer paid $170 when he filed his state income tax return last year. This year, like many others, he got a tax refund -- $250.

"I assure you, I'm the only person who did that math and said, 'Darn it, I got a refund," said Kruckemeyer, realizing that not only were his personal tax projections off, but so were the state's.

The new norm

Kruckemeyer, other economists and lawmakers say this year's budget troubles may be the new norm.

Missouri's rocky finances are likely to carry over to the 2003 fiscal year, which starts July 1, and could extend beyond that.

The state will enter the new fiscal year with less cash than desired, and there will be renewed pressure to restore spending for programs that currently are being cut or held flat.

"There's kind of a pent-up demand for the legislature to address cuts in higher education and in some other departments" by providing more money in years to come, said Sen. John Russell, R-Lebanon, chairman of the Senate Appropriations Committee and 40-year member of the legislature. "This shortfall just compounds it more."

Plus there is this factor to consider: The economists and budget analysts who had incorrectly projected 5.6 percent growth in this fiscal year gathered again in December and forecast 2.3 percent growth in the fiscal year to come.

During the next two weeks, House and Senate negotiators will be hammering out a budget that has been based on that projection. And while lawmakers are working, economists will be studying whether that revenue estimate should be lowered.