States to Slash Spending at Fastest Pace Since Great Recession

(Bloomberg) — US states are expected to cut their budgets, marking a return to more modest levels of spending after years of stimulus-fueled growth and tax cuts.

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Total general-fund spending is expected to fall to $1.2 trillion in fiscal 2025, according to an analysis by the The Pew Charitable Trusts. That’s a roughly 6% decline from estimates of the prior fiscal year, which ended on June 30 for most states.

States haven’t cut at that pace since the wake of the Great Recession. One major difference: today’s cuts represent a pullback from years of supercharged spending made possible by one-time federal aid, which states used to pay for things like infrastructure, pension liabilities and rebates to taxpayers.

Most states grew rainy day funds to record highs in the aftermath of the pandemic. While they’ve begun slowing their savings recently, the funds could help cushion budgets against a weakening economy and lower revenue in areas that slashed taxes.

Overall, about half of US states are planning to spend more, according to Pew. But those increases were dwarfed by California, which swayed the national figure as the state works to close its $47 billion budget deficit, mostly through cutting or delaying spending.

Other states are also slowing spending to address shortfalls. Arizona trimmed education spending and the budgets of state agencies to close a $1.4 billion deficit, according to the report.

Many states seized on newfound financial flexibility to cut taxes to the tune of $13.3 billion in fiscal 2024. Some are still cutting, though at a slower pace.

Hawaii, for instance, just implemented the largest income tax cut in that state’s history — which will total $5.6 billion in lost revenue by 2031, according to the analysis, which used data from the National Association of State Budget Officers. Kansas similarly passed income and property-tax cuts totaling $2 billion over five years, and Nebraska is weighing property-tax cuts.

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