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Analysis: U.S. states poised to give economy a modest boost

By Jason Lange

WASHINGTON (Reuters) - U.S. state and local governments finally appear to be collecting enough in taxes to raise spending and give the broader economy a bit of a lift after several years of being a drag.

While progress in patching up budgets has been uneven across the country, a growing economy has led to higher tax revenues in most states and made officials more confident they can increase spending on infrastructure and education, if only a little.

Late last year, states' tax revenues surpassed the peaks they reached before the 2007-09 recession, even when adjusted for inflation.

And now government finances across the country appear to be on the mend. Local governments hired about 12,000 education workers in the year through May, which was the first increase after nearly four years of substantial declines.

In Virginia, the state government last month passed a law to direct sales tax revenues, which are rebounding, toward transportation infrastructure. The state now estimates it will have about $1.5 billion more a year for projects like widening freeways near Hampton Roads, a major port.

"There's been a fundamental shift," said Sean Connaughton, Virginia's transportation secretary.

Governors and mayors had to slash spending during the 2007-09 recession and then again after a wave of federal stimulus funding dried up. Since 2010, their weak levels of spending have subtracted from national output in every quarter but one.

But the drag has been gradually reducing, and economists think it could soon reverse.

Tax revenues for U.S. states grew about 9 percent in the first three month of this year compared to the same period in 2012, the biggest gain in nearly two years, according to data compiled by the Rockefeller Institute of Government in Albany, New York.

That bodes well for the economy because rising revenues tend to signal gains in future government spending.

Officials in America's hinterlands are unlikely to go on a spending spree, but "if there's money in the bank they will want to spend it," said Donald Boyd, a fellow at the Rockefeller Institute.

The revenue trend suggests state and local government spending will add about a tenth of a percentage point to the annual rate of economic growth in the second half of this year, economists at Goldman Sachs said in a report in May. The boost could be a little stronger in 2014.

That's not nearly enough to offset a tightening of fiscal policy in Washington, which could cut growth by more than a percentage point this year. But it's a far cry from the darker days of 2011 when state and local government spending cuts subtracted 0.4 percentage point from the economy's growth rate.

REBUILDING BRIDGES

Even with the firming of revenues, many officials still worry their budgets will fall short of what is needed to keep infrastructure from falling into disrepair.

Their concerns draw from the federal government's own budget headaches, as well as from the knowledge that many roads and bridges were built more than a half century ago.

States, cities and counties depend heavily on federal dollars, but congressional analysts warn that Washington's fund for transportation spending is running so low it could nearly be wiped out by 2015.

This has left states scrambling to get ahead of future shortfalls. Nobody wants another disaster like the collapse of an aging Minnesota bridge in 2007 that killed 13 people.

Since the recession, the state of Vermont has raised fees charged to motorists and raised gasoline taxes.

But even with the extra revenue, planners in the state legislature believe the state needs to increase transportation spending by about a third just to maintain existing roads, bridges and other ground transport infrastructure.

"We'll just have to see what happens," said Neil Schickner, an analyst at an advisory office for Vermont's state legislature.

Daunting challenges aside, fiscal accounts are still healthier than a few years ago when balanced budget rules in many states led to cuts in spending and fewer budgetary transfers from states to local governments. In 2011, these cuts resulted in 148,000 teachers and other education workers losing their jobs.

Now the economy seems on much firmer footing, aided by more than four years of interest rates kept extraordinarily low by the Federal Reserve. Low interest rates also are making it cheaper for states to borrow.

Legislatures are still finishing negotiations over state budgets for a new fiscal year which begins in July for many states, but there are signs a taste for spending has returned.

In California, Governor Jerry Brown and top Democrats in the legislature agreed to a budget deal on Monday that would raise spending to $96.3 billion in fiscal year 2014, up from $95.7 billion in the current year. California is projected to have a budget surplus in 2014 for the first time in more than a decade.

Scott Pattison, executive director at the National Association of State Budget Officers, says political pressure is growing to spend more on infrastructure.

"The governors and others want to know we are doing what we can to prevent bridge collapses or other tragedies," he said.

(Reporting by Jason Lange; Editing by Andrea Ricci)

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