States across the country, including here in Arizona, are working to craft budgets for the next fiscal year. But policymakers are facing an added unknown this year: what kind of federal support will they get?
A panel of economists last week lowered the amount of revenue they’re expecting the state to bring in from more than $600 million to $277 million. The group cited a few reasons for that, including the uncertainty over tariffs and cuts to the amount of funding the feds are sending to Arizona and other states.
Sophie Quinton, a staff writer at "Pluribus News," which covers state governments, joined The Show to talk about what this could mean for state budget writers.
Full conversation
MARK BRODIE: So just how much uncertainty are budget writers in states across the country are dealing with right now?
SOPHIE QUINTON: You know, I think there’s really tremendous uncertainty, and it’s sort of coming from a number of different areas. So budget writers are sort of looking at the economy, and we’ve seen federal actions sort of depress the economic outlook.
Forecasters at the state level, at the national level, on Wall Street are now increasing the odds that we might see a recession in the near future. And that’s really leading budget writers to think we should really maybe downgrade our assumption of the amount of tax dollars we’re going to bring in next year. Because, of course, if the economy slows down, so does the amount of money that states bring in through tax collections.
Of course, we don’t know what the future holds for the economy, but states are seeing a reason there to be more cautious. They also have their eye on discussions in Congress about potentially cutting federal funding that flows to states to support programs like transportation, public schools, Medicaid. And if the federal government does move to decrease that money that states get significantly, that could also have a huge impact on state budgets.
So really, we’re seeing a lot of change happening at the federal level, and state budget writers are just really — they’re trying to watch a bunch of different things to try to get a better sense of what that means for their budgets.
BRODIE: I would imagine that some amount of economic uncertainty is always kind of baked into the process of forecasting. And economists talk about the art and the science of it, how it’s always a forecast, right? As you say, nobody can predict how much tax revenue is going to come in.
But it seems as though the second part of what you talked about in terms of whether there will be funding cuts to programs like transportation, like maybe Medicaid, things like that — that almost seems like an added level that maybe states haven’t had to deal with, at least to this extent, in a little while.
QUINTON: Yes, I think that’s true. And we just just really don’t know what the federal government is going to do. I think Republicans in Congress have put forward a number of different ideas for cutting Medicaid, for example, or trimming spending in certain ways.
But then we have President Trump who said, “I don’t want to cut Medicaid spending.” We’re sort of getting mixed messages or conflicting messages coming out of Washington. And I think that is making it much harder for states to plan.
BRODIE: So how are states trying to handle this? Like for many of them, including in Arizona, the fiscal year starts on July 1. So you have a couple of months. But typically budgets don’t come together overnight. So how are policymakers trying to handle all this?
QUINTON: Right. I mean, I think the timing on this is really interesting because legislative sessions are pretty short in a lot of states, particularly in the West. In some states, legislatures have already gone home for the year. So months before or weeks before we potentially see a decision on these funding changes in Congress.
So I think lawmakers at the state level are by and large, they’re just trying to be more cautious. They’re increasingly saying no to proposals to spend additional money this year. They’re trying to kind of bake in some extra savings in their budgets. You know, if they’re expecting X amount of dollars to come in through tax revenues in the next year, then maybe saying, let’s set aside a few million of that, just in case we have an unexpected budget hole.
The overall environment for states heading into this year was that budgets were getting tighter and that revenue growth was slowing. So I think lawmakers went into this session expecting to budget more conservatively than maybe they did last year or the year before. But all of this uncertainty around where are revenues going to go, what is the federal government going to do — that’s that sort of encouraging lawmakers to tighten their belts even more.
BRODIE: So are you seeing then, as you say, less new programs, maybe less investment or expansion of existing programs and more of either status quo or even maybe reducing some programs?
QUINTON: Yes. I’m not really seeing a ton of examples of states really cutting programs back beyond what we would expect. There are some states, for instance, that are facing big budget deficits. So in those states, they sort of have to cut back in order to balance their budgets.
But in most states, it’s sort of they think things are going OK. They’re worried about, “Are we going to get less money in the next fiscal year to fund our programs than we thought?” So we’re sort of seeing sort of the beginnings of attempts to deal with that.
But frankly, a lot of lawmakers have also said, “You know, what? We don’t know what the feds are going to do. We can come back in a special session later this year if they cut funding in a really dramatic way that means that we, in turn, have to cut funding for programs.” I don’t think we’re seeing a really intense focus on budget cutting quite yet, except in states where they have a big shortfall that they have to address.
BRODIE: Sophie, you read my mind because my next question was going to be if lawmakers are already talking about the possibility of having to come in mid-fiscal year and make adjustments. It sounds like in many ways they very much are.
QUINTON: Yeah, exactly. Obviously we don’t know what the future holds. But lawmakers have said to me, “We can only budget to where we are now and with the numbers and the forecasts that we have now. If things change, maybe we’ll have to come back to the Capitol to address that.”
BRODIE: Are lawmakers are saying to you that this is different than what they have dealt with in past years? There’s been economic uncertainty in a lot of years, but I wonder if maybe this year to them feels a little bit different than past years?
QUINTON: That’s a great question. I think heading into this session, I mean, we’ve just come out of an extraordinary period for state budgets. You know, in 2020, 2021, coming through the COVID pandemic, states just really saw a revenue boom. They were bringing in much more tax revenue than they expected. The federal government was sending a lot of relief aid.
So there are lawmakers who are in office now who have never really been in the position where they’ve had to deal with a tight budget or deal with deficit. So there’s sort of an interesting dynamic in some legislatures over having these tough conversations. But folks who have been around a long time will say things like, in 2020, when the pandemic hit, we saw states — really, they didn’t know what the future was going to hold unless the economy was going to just crash and really create budget problems.
So when you take the long view, states have faced significant uncertainty before, and they’ve been able to to deal with it.
