States spent record amount in pandemic year

State governments spent more money in the last fiscal year than ever before, bolstered by federal funds meant to help avert an economic catastrophe as businesses shuttered to slow the spread of the coronavirus.

Total state spending topped $2.6 trillion in Fiscal Year 2021, up 16.2 percent from the previous year, according to the National Association of State Budget Officers.

Spending from state general funds, money generated by state taxes and fees, climbed 5.7 percent over the previous year. But spending from federal funds grew by 35.7 percent, on top of a 20 percent increase in Fiscal Year 2020, the report found.

Much of that money came in several rounds of congressionally-authorized coronavirus relief packages. The 2020 CARES Act and the 2021 American Rescue Plan both delivered billions to state coffers. States reported spending $321.6 billion in federal coronavirus relief money last year.

That spending is a stark contrast to the last several recessions, when Congress did not allocate money to help states recover. Those decisions, some economists believe, prolonged downturns and hindered the subsequent recoveries.

“Federal funds have allowed states to provide additional needed aid to segments of the economy most impacted by the pandemic,” said Brian Sigritz, NASBO’s director of state fiscal studies. “Compared to the great recession, the amount of federal funds to states is higher this time around, and also higher than what we saw in the early 2000s when the tech bubble burst.”

States spread their new spending across sectors, the NASBO report shows, pouring billions into public health measures like coronavirus testing and vaccination programs. Public assistance budgets exploded too, jumping more than a quarter from the previous year, while spending on public K-12 education increased by 12 percent as school districts struggled through virtual learning.

At the same time, states took in more money than they expected, and many have finished the year with record surpluses. States took in just shy of $1 trillion last year, up 12.8 percent over Fiscal Year 2020, when the Covid lockdowns took their heaviest tolls.

Personal income tax revenue jumped by nearly 15 percent in the last fiscal year, while corporate tax revenues surged by a third. Sales taxes rose by 7 percent, while gaming and lottery taxes jumped 7.8 percent as more states began offering online sports betting and easier access to lotteries.

Some states are considering using their surpluses to deliver more relief payments to residents, or paying down long-term debt and pension obligations.

For the first time in years, many are optimistic that the future looks bright for states that had been perpetually squeezed in the years after the last recession.

“State fiscal conditions are expected to remain stable, although there are various factors that could impact growth,” Sigritz said. He said revenues are expected to continue growing in the coming fiscal year, albeit at a slower pace than last year.