A great deal has been written about the impact of skyrocketing energy prices on individuals, but what about the effect on state finances? In late March, Justin Theal, senior officer with the Pew Charitable Trust’s Fiscal Fifty team,  wrote a fascinating piece showing how price changes are likely to show up in state budgets. 

As he points out, “those price changes can influence business costs, household spending, and economic activity. Those shifts in turn can shape corporate profits, state tax collection and the assumptions that underpin revenue forecasts.”

These are generally indirect connections, but as Theal points out, a number of states will benefit directly from a rise in severance taxes, which are based on resource extractions.

The states that rely most heavily on energy-related revenues, he finds, are: North Dakota, Alaska, New Mexico, Wyoming, Texas, Oklahoma, West Virginia, Louisiana and Montana. 

In Alaska, as he writes “forecasters say higher oil prices could boost state revenues by hundreds of millions of dollars by the end of the current fiscal year.’

Of course, even though current events indicate that the elevated cost of gas and oil may continue for some time, the news can change quickly and states would be wise not to count on their fiscal benefits far into the future.

Based on other Pew research, Theal offers the following three pieces of advice for states that are benefiting from the current situation:

• “Save during boom years: Many energy-producing states set aside a portion of revenue through rainy day funds or permanent trust funds to cushion future downturns. Alaska, Wyoming, and North Dakota, for example, have long-standing funds supported by mineral revenues, while New Mexico has built up sizable reserves in recent years as oil production increased.”

• “Avoid using temporary revenue for ongoing expenses. If states treat price-driven windfalls as permanent revenue growth, they risk creating structural budget gaps when prices fall.”

• “Conduct regular budget stress tests. These analyses help policymakers assess how shifts in oil prices or economic conditions could affect revenues and whether available reserves would be sufficient to respond.”

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