In 2025, the Legislature will meet to pass a state budget that must be balanced based on projected revenues, as required by state law. This spring, policymakers may face a less rosy state revenue scenario than they have in any of the last four biennial state budget cycles.
Two key state budget funds, the General Fund and the Education Trust Fund, support critical services and local government operations.
These funds share several revenue sources and are considered an important barometer for state revenues.
These two funds ended State Fiscal Year (SFY) 2024 with an unaudited $126.4 million (4%) revenue surplus. From July to October of SFY 2025, cash revenues were $1.1 million (0.1%) below planned amounts. This indicates revenues are effectively on target with planned amounts this year, and the biennium still has the revenue cushion from last year’s surplus.
While these figures do not directly indicate challenges, the changing composition of revenue growth suggests future risks. In SFY 2023, about 57% of the state’s $527.2 million surplus was generated by combined Business Profits Tax and Business Enterprise Tax revenues. Meals and Rentals Tax revenues, Lottery Commission profits, and Real Estate Transfer Tax revenues each contributed more than 5% to the total surplus as well.
In SFY 2024, 51% of the surplus was attributable to interest the state earned on cash holdings, and 48% was due to higher-than-expected revenues from the Interest and Dividends Tax. Both revenue sources are likely temporary, as the Interest and Dividends Tax is due to be repealed next year, and state interest collections will go down as interest rates decline and the one-time federal cash grants the state currently holds are depleted. All other revenue sources comprised a net of 1% of the surplus in SFY 2024.
More recent data suggests overall revenue growth has stalled. In the last 12 months, variable revenue sources to the General and Education Trust Funds have generated an average of $6.1 million less each month than they did in the previous year. Prior tax rate reductions have decreased revenue relative to the amounts that would have been collected with the earlier tax rates in place.
Revenues can be volatile, particularly Business Profits Tax revenues that are highly dependent on national corporate profits at large entities, and future revenues may be more favorable than current data suggests. However, even before considering any increased service needs or inflationary pressures, recent revenues suggest balancing the next state budget may be challenging.
