We’ve written much about the surge in state spending and revenues, much of it on the back of one-time aid to individuals, businesses, and government itself. Now comes a Pew analysis, the first in the group’s Legislative Review. Washington’s fiscal response was duplicated in many other states. And now begins the questioning.
When legislative sessions ended last year, governors and state lawmakers were braced for a prolonged recession caused by the COVID-19 pandemic. They’d frozen hiring for government jobs and cut funding for services such as education, expecting tax revenue to plummet along with the economy.
But the recession lasted just two months. State tax collections came in so much higher than expected last fiscal year—and are expected to grow so much this year—that lawmakers were able this session to restore past cuts, save money for future emergencies and spend more on everything from housing to income tax reductions.
The bonanza doesn’t stop there. States are receiving more than $195 billion in additional money from the American Rescue Plan, the COVID-19 aid package signed by President Joe Biden in March.
Now, rather than fretting about a downturn, state budget writers are wondering how long the boom can last. Some lawmakers worry new spending and tax cuts this year went too far, with criticism falling along familiar partisan lines.
One analyst points out that too much money can also pose problems for policymakers.
The March COVID-19 relief package may be sending states more cash than they can easily spend, said Jared Walczak, vice president of state projects at the Tax Foundation, a conservative-leaning Washington, D.C., think tank.
“For most states, the fiscal relief in the American Rescue Plan Act is the very large cherry on top,” he said. “The cherry they don’t know what to do with.”
Unemployment trust funds – and the employers who pay into them – will receive some help.
Many states’ leaders want to use the federal funds to shore up their unemployment insurance trust funds, which are funded by taxes on employers. The funds were drained when unemployment spiked early in the pandemic. Many states had to borrow money from the federal government to keep paying benefits.
By using federal relief dollars to rebuild their funds, states can avoid raising business taxes. Kentucky lawmakers have used about a quarter of the state’s $2.2 billion allocation to refill the state trust fund, for instance. Indiana, Louisiana and Washington state leaders also have set aside hundreds of billions of federal relief dollars for their trust funds.
The article closes with an appropriate level of uncertainty about future fiscal conditions.
And it’s unclear whether recent state tax revenue growth is a product of underlying economic conditions or a result of the federal government temporarily putting more into people’s pockets.
That’s a big source of uncertainty, said Lucy Dadayan, a senior research associate with the Urban-Brookings Tax Policy Center at the Urban Institute. “Once the federal stimulus money runs out, we don’t know how the state fiscal picture is going to look.”
We would have preferred more spending discipline in the last session. And caution prudence in making any new commitments in the session ahead.