States now flush with cash after depths of pandemic

SACRAMENTO, Calif. — In the days after Gov. Gavin Newsom (D) became the first in the nation to order a statewide lockdown to slow the spread of the coronavirus, the stock market cratered and commerce dried up.

A terrifying sense of deja vu gripped state lawmakers who still had vivid memories of a decade earlier when the Great Recession forced California’s government to cut services and spending to the bone.

“When the pandemic began, we shut down the economy and our sales tax revenues plummeted,” said Assemblyman Phil Ting (D), who heads the budget committee. “There was no revenue of any sort at all, except for grocery stores and some restaurants doing takeout.”

Newsom’s office at the time projected a $54 billion deficit in the year ahead, a sum equivalent to about a quarter of the entire state budget.

“The magnitude of it was incredibly frightening,” Assemblywoman Buffy Wicks (D) recalled in a recent interview. “You had both the raw numbers you were looking at, in addition to a totally unprecedented virus that you didn’t know when it will be over.”

Now, two weeks before Newsom rolls out a mid-year budget revision, California’s fiscal picture has almost completely reversed.

In January, the state’s Department of Revenue forecast a $15 billion surplus. Two months later, tax revenues had come in nearly $17 billion above forecast.

And that was before Congress approved hundreds of billions more for state and local governments to pay for and recover from the pandemic that has killed more than 500,000 people in America.

In states across the country, legislators who once stared into a terrifying abyss of red ink now face an embarrassment of riches, funded by a booming stock market, rising wages for those at the upper end of the economic stratosphere and what economists say is an unprecedented shift in the way consumers are spending their money.

Budget cycles differ by state, and legislators everywhere are in different stages of arranging their fiscal houses.

But the trends are clear: Minnesota, which once faced a $1.3 billion deficit, now expects a $1.6 billion surplus. Michigan budget figures earlier this year showed a $2.5 billion surplus. Connecticut’s surplus was estimated at $70 million in January, and $130 million by March.

Colorado’s surplus stands north of $5 billion. Rhode Island will have an extra $44 million to play with. Oregon’s tax revenue came in so far ahead of expectations that the state is expecting to shell out more than $500 million in refunds to taxpayers, a provision in state law known as the “kicker.”

The catastrophe avoided comes in part from a stock market that has exploded during the pandemic. The S&P 500 index is up 81 percent since its nadir on March 20, 2020. The Dow Jones Industrial Average is up 76 percent over the same period. Capital gains from those advances have helped make up for lost revenue growth; in states like California, specific initial public offerings from companies such as DoorDash and Airbnb provided their own unique boosts.

State residents also played a role in boosting state revenue. With most service businesses shuttered, consumer spending shifted to goods, especially through e-commerce. A 2018 Supreme Court decision forcing online retailers to collect state sales tax, South Dakota v. Wayfair, meant a sustained infusion of cash headed to state coffers.

Federal expansion of unemployment benefits, first through the $2.2 trillion CARES Act signed by then-President Trump and then again through President Biden’s $1.9 trillion American Rescue Plan, meant even the millions who were unemployed by the pandemic could keep spending.

“Sales tax was a surprise for many states because people, even those who lost their jobs, were still getting unemployment insurance and they could still spend money,” said Lucy Dadayan, a senior researcher at the Urban-Brookings Tax Policy Center who specializes in state budgets. “If the pandemic-induced recession happened prior to Wayfair, the situation might have been very different but the online sales taxation helped a lot.”

With billions of dollars in federal aid still on the way through the American Rescue Plan, states face a new dilemma: how to spend extra money now that will not come again in the future. Some legislators are worried that the allure of extra money could tempt their colleagues into creating ongoing programs that would last well beyond the exhaustion of federal dollars, putting states on the hook for more spending in the future.

“What are we going to do with all this money?” California Assemblyman Chad Mayes (I), a former Republican leader, said in an interview. “Everyone’s using the pandemic as some sort of excuse.”

Not every state has weathered the recession so well. Nevada and Hawaii, heavily dependent on tourism and hospitality that was all but shut down during the pandemic, will take years to recover. Alaska and North Dakota, both reliant on oil extraction, saw revenue tumble. Through the middle of last year, West Virginia saw its tax collections drop by the largest percentage in 25 years, according to data compiled by the Pew Charitable Trusts.

“Winners and losers of the pandemic-induced recession depend on tax structures and the industries,” Dadayan said.

The momentary catastrophe and the federal bailouts have helped states survive for now, but many analysts and legislators are worried the positive trends mask a longer term slump. States cannot go into deficit like the federal government — 49 states have balanced budget rules on the books, with Vermont as the lone exception — and many were headed in a troubling direction before the pandemic.

“States are still very much worried about the longer term fiscal picture,” Dadayan said. “The longer term picture is still very gloomy because there is so much that can happen.”

In California, legislators who had to cut government services so substantially just over a decade ago are breathing sighs of relief, though they are conscious of the pressures ahead even after 10 years of surplus and savings.

“California’s revenues continue to be good, but we’re mindful that we have to continue to be somewhat cautious in how we spend,” said Toni Atkins (D), the state Senate president pro tempore who first won election to the state Assembly just after the worst of the Great Recession. “The environment of the pandemic was like a cold bucket of water on us.”