Like Alabama families watching the rising costs for groceries, gasoline and other goods, state officials are monitoring inflation increases that could hurt government budgets and buying power.
“It’s certainly going to affect (state spending); there’s no question about it,” said Rep. Steve Clouse, R-Ozark, chairman of the House General Fund budget committee. “Just through the everyday cost of running agencies, transportation cost, it is going to filter down to the state level and we’ll have to compensate for that.”
The U.S. Department of Labor this month reported inflation at the wholesale level rose 8.6% in September compared to a year ago, the largest advance since the 12-month change was first calculated in 2010.
Meanwhile, inflation at the retail level rose 0.4% in September with its consumer price index up 5.4% over the past 12 months, matching the fastest pace since 2008.
Kirk Fulford, deputy director of the Legislative Services Agency, said there was increased demand for goods and services this year, which, coupled with the huge amount of stimulus funds provided to citizens, will cause prices to rise.
“Everything will cost more, from gas to groceries to inputs to production, which will put increased pressure on wages and salaries to keep up with costs,” Fulford said. “This is even heightened when the labor market is tight. You can see this now in many work environments.”
ALDOT and Gas Taxes
The biggest single buyer of goods in state government is the Alabama Department of Transportation. Tony Harris, ALDOT’s government relations manager said it continually watches trends in bid prices and in the supply markets that affect roadbuilding.
“While we’re not seeing anything alarming just yet, we’ll continue watching trends for consumer inflation and the more specialized construction indexes that affect road and bridge construction,” Harris said.
If inflation continues, it could cause an increase in the cost of construction and maintenance, Harris said. Plus, the state’s road and bridge construction fund is made up of gasoline and diesel taxes.
An average gallon of regular grade gasoline is $3.17 in Alabama, according to AAA. That’s below the national average of $3.37 and well below California’s average of $4.53.
“If gas prices continue upward, it may cause a decrease in nonessential driving, which would reduce revenues for ALDOT projects,” he said.
Can Taxes Fill Holes Left When Relief Money Goes Away?
Fueled by federal relief money, the General Fund and Education Trust Fund budgets saw double-digit growth in 2021, but Fulford previously warned that growth won’t hold.
“This is certainly something that we have to take into consideration as we move further into fiscal year 2022 and start working on the fiscal year 2023 budgets, which is why it is important that we understand that the impact the federal COVID stimulus and other assistance had on 2021 revenues is temporary and should not be considered ‘real’ growth,” Fulford said.
“It may very well take some time before our revenue streams return to a normal pattern after the assistance and federal funds run out.”
Lawmakers will start considering the state’s fiscal year 2023 budgets in January when recommendations are presented from the Alabama Department of Finance.
Finance spokesperson Jana Ingels said the department is studying projected future revenues and possible affecting factors, including inflation.
“While the rate of inflation has risen over the past year, many economists expect some leveling out as supply chain capacity increases and the economy adjusts to post-COVID spending levels,” Ingels said. “The department will continue to monitor these matters and adjust forecasts accordingly.”
Like a family’s budget, inflation can cut into the state’s potential spending, Clouse said.
“We have to be cognizant of that and be aware of those increases,” he said.
In the Senate, General Fund committee Chairman Greg Albritton, R-Range, has for months been talking about inflation and his concern that it will get worse.
“One of the biggest problems with inflation is it brings an instability into factor,” Albritton said. “It’s hard to budget when you don’t know what anything is going to cost. From the state level, there’s nothing we can do about (inflation) except try to plan around it.”
Albritton said he hopes to have state agency budget hearings in December ahead of the January session.
“We need to start having meetings on this to get people’s attention,” said Albritton, who hopes agency leaders will take into account rising prices.
In addition to the state’s two budgets, lawmakers in January will also allocate another $700 million in American Rescue Plan Act funds, with the final $1.1 billion expected to arrive in May after the session has concluded.
Citing the influx in federal dollars, Albritton said he’s concerned “there’s not going to be any appetite to be conservative.”
Taking Inflation Into Account
Othni Lathram, director of the Legislature Services Agency, which helps lawmakers draft bills and budgets, said the Legislature considers inflation on big-ticket and global issues.
“Our estimates on the prison construction project account for what we consider to be higher than normal inflation risks over the construction period,” Lathram said.
“Additionally, inflation is a strong consideration for the Legislature’s passage of cost-of-living allowance increases over the past few years,” he said.
Sen. Arthur Orr, R-Decatur, who chairs the Senate education budget committee, said increased inflation could mean an uptick in state tax revenues if people have to pay more for goods.
“I think that’s one of the reasons we need to look at a tax cut of some sort to send this money back to the people,” Orr said Monday. He’s previously said he’s considering tax-cut legislation for the 2023 session.
Meanwhile, pay raises for state employees and educators will be considered for 2023.
“With inflation going up, we have to stay on top of passing along pay raises to stay competitive with the marketplace,” Orr said. “There’s a real demand for employees out there, the supply is low and wages are headed north.”