WASHINGTON -- States started a new fiscal year with healthy budgets that are the result of strong economic growth, not tax increases that go into effect this year, a new report said.

"An improving economy boosted revenue performance in fiscal year 1994 and will provide stable but moderate revenue growth in fiscal year 1995," said the report, released by the National Conference of State Legislatures and based on the group's annual survey of states.

Officials expect state revenues to grow by 4.2% in fiscal 1995, which started on July 1 in most states, compared with 3.2% last year. But they expect spending growth to remain stable at about 4. 1%.

"Improvement in the overall economy seems to be driving most states' optimism regarding revenue growth," the report said, which is a preliminary version of a more detailed report due out in the fall. Forty-eight states participated in the survey.

Many states' 1995 budgets include tax cuts for individuals and businesses, the report noted. But overall, new revenues from tax increases are expected to surpass revenues lost from tax cuts.

Legislated tax increases included in 1995 budgets are projected to yield states a $3.8 billion net gain in revenues, very close to what states gained in each of the two previous years.

However, the actual impact on taxpayers is not as bad as it looks. Half of the $3.8 billion comes from the extension of taxes that were set to expire at the end of the year, the study said.

The situation is further muddled by Michigan, which expects to raise $3 billion in additional revenues from new taxes. But the money is intended to partially offset property tax cuts that are estimated to save taxpayers $4.4 billion.

Overall, the report says states will raise no new revenue this year from tax increases and fiscal 1995 will be the first year since 1985 that state revenues fail to grow because of legislated hikes.

"The 1994 legislative sessions [that produced fiscal 1995 budgets] were marked by few tax increases," the report said. "The overwhelming majority -- 36 states -- either reported no' tax actions, minor tax increases, or decreases of less than 1%."

New Jersey was the only state to cut taxes by more than 5%, while Louisiana and Michigan were the only states that increased taxes by more than 5%, if property taxes are excluded, the report said.

State spending is expected to grow by about 4.1% this year, keeping pace with anticipated revenue growth. But states are not necessarily finding new ways to spend their money because Medicaid and correctional programs are expected to keep growing faster than other programs.

States expect to spend 7.7% more on prisons this year, down from almost 10% growth last year. The cost of prisons is now the fasting growing spending category for states, the report said.

"States report that the operating costs for new prisons are driving the big increases," the report said.

Medicaid remains troublesome for states, but to a lesser degree than before. "Although Medicaid spending continues to grow rapidly in many states, general and earmarked funding on average is expected to grow by only 5.4% for fiscal 1995," the report said. Earmarked funds are those set aside for specific purposes, such as education.

However, when earmarked funding is excluded, Medicaid spending is expected to grow by more than 9% this year.

"Despite some states' general fund spending increases in the magnitude of 10% to 12%, several states noted that the rate of increase has slowed from the 16% to 18% rates of just a few years ago," the report said.

Spending on primary and secondary education is usually the biggest budget item for most states. Growth in general fund spending on public education is likely to keep pace with revenue growth this year, the report said. But when earmarked funds are included, growth in public education spending is expected to rise by 7.3% this year, second only to corrections.

An "important shirt" in state spending is that states are funding more programs with earmarked funds rather than money from their general funds. "Michigan's recent shift of [public education] funding from the general fund to an earmarked fund is one example," the report said.

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