By Jon Kamp 

States' revenue collections are off to a strong start in the current fiscal year, building on gains pegged to the expanding economy and help from the federal tax overhaul.

With most states nearing the midpoint of their fiscal years, which end June 30, at least 19 of them are seeing higher-than-expected general-fund revenue, according to a report from the National Association of State Budget Officers released Thursday. States topping forecasts include Connecticut, Georgia, Pennsylvania and Washington.

Among other states reporting so far, another 14 say revenue is meeting projections in fiscal 2019, while five say collections are coming in short, according to Nasbo.

This follows 40 states surpassing their revenue projections in fiscal 2018, and continues a turnaround from the prior two years.

"Clearly, from what I've observed, a continued, much-improved personal-income tax situation" is feeding the states' revenues, said John Hicks, Nasbo's executive director. "But also, we're seeing an improved sales tax."

The states' personal income-tax collections grew by a median 7.9% in fiscal 2018, Mr. Hicks noted. And general-fund collections from personal-income taxes outperformed forecasts by 3.6%.

Nonwage income, such as capital-gains taxes from investment sales, played a big role in boosting personal-income taxes, Mr. Hicks said.

States are still trying to adjust to the federal tax overhaul Congress passed in late 2017, "and it remains to be seen how much of the revenue gains states have experienced of late will be recurring versus one-time, " Nasbo said in its report.

The tax law capped state and local tax deductions but didn't touch capital-gains rates -- a combination that raised the combined federal and state tax rate for many top earners. As a result, some people had an incentive to realize capital gains in 2017 before that rate increase happened.

Nasbo's report said states have boosted appropriations by $41.1 billion this fiscal year over the prior year's enacted budgets, with more money allocated for education, Medicaid and other government services.

The report also shows states are beefing up rainy-day funds, which they lean on when the economy goes south. Nasbo said 31 states boosted their rainy-day fund balances in the fiscal 2018, and 26 are projecting increases this year.

Still, many states face long-term spending pressures in areas like health-care costs, pensions and education, the report said.

Connecticut, a state struggling to fill budget holes, said last month that better-than-expected revenue is forecast to shave nearly $600 million off a budget gap looming in the two-year period that starts July 1. But the state still forecasts a shortfall of more than $4 billion in its general fund for those two years.

"Governor-elect [Ned] Lamont and the next General Assembly will have a difficult task ahead in balancing the budget and keeping it under the spending cap, but the economic performance we are experiencing has made the task more manageable," Benjamin Barnes, secretary of Connecticut's Office of Policy and Management, said in a statement.

Connecticut is among the states socking away reserves for the next downturn.

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Joseph De Avila

contributed to this article.

Write to Jon Kamp at jon.kamp@wsj.com

(END) Dow Jones Newswires

December 13, 2018 05:44 ET (10:44 GMT)

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