While states are continuing to see modest progress in their struggle to dig out from the 2008 recession, the era of chronic budget instability and wholesale service cuts appears to have ended, according to a report released Tuesday by the National Association of State Budget Officers. The rate of revenue growth in 2014, however, is expected to be significantly lower than in 2013, the report said.
Of particular concern to budget officers was a falloff in the taxes that states are projected to collect this fiscal year, said the executive director of the association, Scott Pattison. Growth is expected to be essentially flat — 0.8 percent — in the 2014 fiscal year, which started in October, compared with an estimated 5.7 percent increase a year before.
One reason for the smaller growth was a one-time surge of revenue in 2013 due to changes in federal tax laws that led some individuals, particularly the most wealthy, to sell assets before Jan. 1, 2013, to avoid higher rates for capital gains and dividends.
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But there were other factors, Mr. Pattison said. Several states, most prominently those with Republican governors, enacted tax cuts that take effect in the coming year, enough so that taxes in across the 50 states, in the aggregate, will go down next year. The federal cuts known as sequestration and the partial government shutdown added uncertainty to budget projections, he said, as did soft consumer spending.
The report mirrors a study released Monday by the Nelson A. Rockefeller Institute of Government that found that the vigorous growth in revenue in the final quarter of 2012 and first quarter of 2013 has largely dissipated with states reporting "significantly softening revenue growth."
Spending in state budgets grew 3.6 percent, or $26.3 billion, for the 2014 fiscal year, the state budget directors' study found. Spending growth in the previous fiscal year was 4.3 percent; both figures are well below the historical average growth rate of 5.6 percent.
"We are seeing growth in the states, but it is not nearly at the levels we have seen historically," said George Naughton, Oregon's chief financial officer and the president of the National Association of State Budget Officers.
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This period of lower growth is likely to become a significant factor in statehouse politics and the midterm elections, when there will be 36 races for governor, and candidates will argue how to spend the state's money and whether to respond to a slowdown in tax revenue.
"On the one hand, state budgets are stable now," Mr. Pattison said. "There is not the volatility where you had to go in and make pretty significant cuts almost randomly during the year based on tax collections. But on the other hand, there's not enough money coming in for everything that's either desired or necessary for states to spend money on."
States saw major drops in revenue in 2009 and 2010, the years of greatest impact from the recession, followed by four years of growth, albeit below the levels before the recession. The question now is whether the lower projections for 2014 are another anomaly, caused by sequestration and other factors, or the "new normal" that states can anticipate, Mr. Pattison said.
So far, the Affordable Care Act has had little effect on budgets, since the law is still being put in place, but that will change once it is up and running.
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"Almost a third of the money that states receive and spend and allocate comes from the federal government, and a lot of that is from Medicaid, about 44 percent," Mr. Pattison said. "That's really going to grow as a percentage with implementation of the law."
State tax cuts played a role in the drop in revenue growth, Mr. Naughton said. Over all, states cut taxes by $2.1 billion in the 2014 fiscal year, led by a personal income tax cut of $1.6 billion in Ohio and $320 million in Wisconsin. A temporary sales tax expired in Arizona, and there were also significant tax cuts in Alaska, Pennsylvania and Texas.
The study did not look specifically at the impact of the sequestration and a partial government shutdown on the states, but the association said both spending and, thus, tax revenue were affected.
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"Sequestration does have an impact on how people spend," Mr. Naughton said. "We in the states are seeing that. When we move to the partial government shutdown, there were also impacts on that side."
States also saw a slight decrease in the levels of "rainy day funds" that they use for emergencies, to $56.7 billion, or 8.2 percent of general fund expenditures, in those states that have passed their 2014 budgets from $67 billion, or 9.6 percent of general fund expenditures, in 2013.
For the most part, states did not respond to the surge in revenue last year by hiring more workers, and state hiring is not expected to rise in 2014.
—By Rick Lyman of The New York Times.