Record revenues pour into states

Booming revenues are filling state budget coffers across the country to the brim as both higher wages and higher prices increase tax collections far beyond expectations.

A review of state fiscal offices conducted by the National Conference of State Legislatures (NCSL) found half the states now expect to exceed revenue projections this fiscal year, projections that were already far higher than in previous years. Another 17 states are on pace to meet their expectations.

The good news comes two years after the onset of the coronavirus pandemic, when state budget officers looked into an abyss of red ink in the midst of business shutdowns and mass layoffs that appeared to be the brink of the next Great Depression.

But the rapid recovery, bolstered by trillions in federal spending, including billions directed to state and local governments as well as direct aid to individuals and families, has turned what could have been a budgetary catastrophe into an unprecedented wave of revenues.

The situation represents “a total 180 from where we were at the start of the pandemic,” said Erica MacKellar, who runs the NCSL’s Fiscal Affairs Program. “This quick rebound is really positive for states.”

Almost half the states’ project personal income taxes will exceed expectations this year, as wages rise and people earn more money. Five more states expect to meet projections that have already been revised upwards.

Sales tax revenues are likely to beat expectations in more than half the states. About half the states had already raised their sales tax revenue projections in recent months.

But while higher income tax revenues are a sign that residents are earning more, higher sales tax revenues mean they are spending more — due at least in some part to inflation. MacKellar said some states had noted that inflation was a part of the reason they expected to take in more sales tax revenue.

Lucy Dadayan, a state budget expert at the Urban-Brookings Tax Policy Center, said the news is not entirely positive for state fiscal offices because of a growing disconnect between tax revenues and state economies, which are growing far more slowly. Consumers changed many of their spending habits during the pandemic, in ways that were positive for state tax revenue growth.

When those habits revert back, Dadayan said, the good times will come to an end.

“Consumers will continue resuming their pre-pandemic activities, which means spending more on services than on goods, which will impact sales tax revenues,” Dadayan said.

Governors and legislators are considering how best to use their newfound good fortune. Many Democratic-controlled states are debating giving one-time direct payments to taxpayers, while Republican-run states like Iowa and Mississippi have passed substantial tax cuts.

In a recent report, Dadayan warned that using today’s boon for permanent tax cuts can come back to haunt states when the red ink begins to flow once again.

“This year’s large surpluses can quickly turn to shortfalls in the wake of permanent tax cuts,” she wrote.