U.S. extends tax relief as state spending grows

U.S. Congress this week passed legislation covering fiscal 2016 (FY16) spending appropriations (exceeding the 2011 sequester cap) and a basket of tax credits, deductions and adjustments with a net revenue cost surpassing a half trillion from FY16 to FY25. This early Christmas present for multiple interests is expected to widen projected federal deficits. Around 50 tax breaks previously requiring regular renewal are made permanent or at least multi-year. For business, notable measures now permanent include the R&D tax credit and, for small business, expensing up to $0.5 million annually in equipment and IT investments. The spending bill removes a four decade ban on U.S. crude oil exports, in exchange for several environmental initiatives, such as extending and then gradually lowering wind and solar tax credits. 

Legislative adjustments to Obamacare include: suspending for 2016 and 2017 the medical devices tax implemented in 2013; and, delaying from 2018 to 2020 the introduction of the 'Cadillac' tax on high-end health benefits that is expected to impact many public- and private sector middle-class workers. Among the measures assisting low income citizens is making permanent the Earned Income Tax Credit. Whether this revised tax framework offers a starting point for more comprehensive tax reform awaits the upcoming election year. 

Many of the federal measures impact State finances, such as making permanent the State/local general sales tax deduction as an option to the State/local income tax reduction. The Fall Survey of States, conducted by the National Association of State Budget Officers, indicates most States on track for a sixth consecutive year of measured fiscal expansion. General Fund receipts, after accelerating to a 4.8% gain in FY15, are forecast to advance just 2.5% in FY16, with last year's revenue boost from buoyant 2014 stock markets not repeated in calendar 2015.

State General Fund expenditures, following an estimated 4.6% rise in FY15, are expected to climb a further 4.1% in FY16, topping the FY08 pre-recession peak by 15% in nominal terms, but remaining slightly below this peak after inflation adjustments. The FY16 increase, however, is elevated by double-digit jumps in three States due to one-time events, such as New York's $4½ billion transfer to a dedicated infrastructure fund. Excluding these three States, the FY16 rise is just 2.0%, with the 2.9% median increase pacing FY15. The recent federal Highway Bill, offering funding of $305 billion for the next 5 years, offers a more certain path for States, but no material annual increase to close infrastructure gaps. The anticipated FY16 absolute decline in year-end State balances in part reflects Alaska's draw to offset low oil prices, though its FY16 reserves are still expected to cover 88% of its General Fund expenditures.