Massive Cash Flow Sparks State Spending Sprees

This story was originally posted by Stateline, an initiative of the Pew Charitable Trusts.

DENVER — When Colorado lawmakers head back to the state Capitol in January to negotiate the next yearly budget, they’ll have a rare opportunity to spend billions of extra dollars.

They can dole out $3.3 billion of unexpected, additional state tax revenue, plus $2.6 billion in unspent federal COVID-19 relief funds. And more money is on the way: President Joe Biden plans to sign a $1 trillion infrastructure bill that’ll fund about $1 billion worth of projects in Colorado.

“It is a very exciting time,” said state Rep. Julie McCluskie, a Democrat and vice-chair of the Joint Budget Committee. “To think that we can come out of this pandemic, and at the same time, address issues that maybe have been plaguing us.” 

State lawmakers nationwide say they’ll be able to invest in longtime priorities next session, thanks to booming tax revenues and federal aid. 

But Democrats and Republicans will clash over how to spend the money. Democrats are more likely to push for social services and environmental projects, while Republicans are more likely to champion tax cuts. There’s room for compromise over many big-ticket items, however, such as funding for schools and infrastructure improvements. 

Lawmakers on both sides of the aisle are grappling with how to responsibly spend one-shot federal funds. “We’re very concerned about the size of government that’ll result after the one-time spending,” said Colorado state Sen. Bob Rankin, a Republican who also serves on the Joint Budget Committee. 

Rankin said Republicans don’t want Colorado to launch new programs the state can’t fund over the long term. “Let’s not start something that we can’t sustain.”

In most states, governors are just starting to draw up budget plans for the next fiscal year, which typically starts July 1. They’ll rely on revenue estimates that state analysts have yet to release. Estimates from the summer and early fall, however, have made policymakers optimistic.

Many states ended fiscal 2021 this summer with the largest surpluses in their history, thanks to surging state revenues, investment income and federal COVID-19 aid.

Iowa ended the year with a $1.24 billion balance in its general fund, for instance; that’s equivalent to about 16% of general fund money budgeted for fiscal 2021. Virginia had a $2.6 billion surplus, equivalent to about 11% of general fund money budgeted that year.

The growing economy, rising stock market and strong consumer spending continue to boost tax collections, budget experts say. Revenues have come in so far above expectations that they’ll trigger tax rebates next year in some states, such as Colorado, Oregon and Indiana.

In Idaho, lawmakers are looking at a $1.5 billion surplus, said Alex Adams, the state’s chief budget officer. That’s huge, considering the state’s last budget set total spending at about $4.3 billion.  

“I’ve never seen numbers like this before,” said Idaho state Rep. Rick Youngblood, a Republican and chair of the House Appropriations Committee. He’s previously said that lawmakers likely would focus on education, infrastructure and tax cuts in the upcoming session.

Budget experts also are increasingly confident that revenues will continue to grow, though they’ll likely flatten out in future years.

“We’re looking at more sustained growth right now, and less of the ebb and flows we saw immediately after the pandemic began,” said Brian Sigritz, director of state fiscal studies for the National Association of State Budget Officers, a Washington, D.C.-based membership group.

Rolling in Revenue

Legislators in 33 states will meet early next year to pass budgets for fiscal 2023, according to Sigritz. The Kentucky, Virginia and Wyoming budgets also will cover fiscal 2024. The remaining states already have passed budgets for fiscal 2022 and 2023. 

Tax revenues are growing in almost every state, said Lucy Dadayan, a senior research associate with the Urban-Brookings Tax Policy Center at the Urban Institute, a Washington, D.C., think tank. Nationwide, state tax revenues grew 17.3% in August 2021 compared with August 2020, she has found. 

“We keep seeing revenues perform much stronger than revenue forecasts,” Dadayan said.

Payroll tax collections, for instance, are rising even though a higher share of workers are unemployed now than before the pandemic. She speculated that could be because employed workers are getting extra pay, such as bonuses, in the tight labor market.

Energy prices also have risen recently, helping Alaska, Wyoming and other states that rely on taxes from fossil fuel extraction and energy companies.

“Oil prices are up, and everyone kind of understands that the budget situation is a little bit—well, is a lot better than we were anticipating, based on the spring forecast,” said Dan Stickel, chief economist for the Alaska Department of Revenue’s tax division.

His team is now expecting the state to collect almost $6 billion in unrestricted, general fund revenue in fiscal 2022, compared with about $4.7 billion collected in fiscal 2021.

And last fiscal year in Alaska, state revenues that can be used only for specific purposes—such as the value of the state’s investment fund, known as the permanent fund—skyrocketed.  

“Fiscal year 2021 was, by far, the largest total revenue in the history of our state,” Stickel said. “Almost $30 billion in total revenue. And that has to do with the massive federal stimulus and the huge return on our investments.”

Most state leaders also are sitting on millions of dollars of federal aid they received under the March American Rescue Plan Act. That law sent states and the District of Columbia more than $195 billion to spend on pandemic relief and economic recovery. Some states got all the money at once, and others will get the money in two stages—half this year, half next year. All states have until 2024 to decide how to spend the cash. 

California, Indiana, Maine and Montana already have allocated all their money, according to the Center on Budget and Policy Priorities, a left-leaning think tank based in Washington, D.C., that’s tracking the funds. Twelve states haven’t allocated a penny, and the remaining 34 have allocated some money. 

So far, policymakers have spent the largest amounts to fill budget gaps that emerged since the pandemic began, said Ed Lazere, a senior fellow on the center’s state fiscal policy team. Next year, they’ll likely focus more on specific policies and programs to address the crisis and speed economic recovery.

“As we look into the next year,” Lazere said, “the fact that states have more time to think about how to spend the money also means they’ll do somewhat less revenue replacement and more specific allocations.”

‘Once-in-a-Lifetime Opportunity’

Governors and legislators are jumping at the chance to spend big on policies and programs they care about.

In Colorado, Democratic Gov. Jared Polis—the first governor to release a fiscal 2023 budget—has proposed a $40 billion budget, 4% larger than the prior year. He wants to spend hundreds of millions of dollars on unemployment insurance, home health services, schools and carbon emission reductions, among other programs and projects. 

“It’s a guide for how we can capitalize on this once-in-a-lifetime opportunity to address some of our state’s most challenging issues,” he said at a news conference Nov. 1 announcing the budget plan.

Other governors are proposing tax cuts. Maryland Gov. Larry Hogan, a Republican, wants to cut taxes paid by older adults, for instance. Kansas Democratic Gov. Laura Kelly wants to eliminate the state sales tax on groceries. And Arkansas Gov. Asa Hutchinson and GOP legislative leaders in his state want to cut individual and corporate income tax rates.

Hutchinson and the lawmakers say that as tax revenues likely will continue to grow, the state can afford a tax cut. Democrats aren’t so sure. “There is room for a tax cut,” said Democratic state Sen. Keith Ingram, the Senate minority leader, “but on the level that some are talking about, I think is—could be dangerous in the future.”

Ingram said it’s odd to be talking about a surplus when schools and services for people with disabilities are underfunded. “The idea that we are looking at tax cuts off a fully funded government in the state is not the reality,” he said.

In Colorado, Republican lawmakers in the Democratic-led legislature plan to call for tax cuts for residents next session, Rankin said. “The cost of living for the average citizen is going up pretty dramatically,” he said. “You can’t buy a house, you can’t rent a house, food prices are up, everything’s up.”

It’s not yet clear how additional infrastructure funds authorized this month by Congress will affect state budget decisions. Governors and lawmakers are waiting for more information on the money headed to their state.

Rankin said Polis has told lawmakers he didn’t set aside much money for infrastructure in his budget proposal because of the federal bill. Polis’ office did not respond to requests for comment.

Idaho Republican Gov. Brad Little has hinted that he wants to spend some of the state’s American Rescue Plan Act dollars on infrastructure projects, such as broadband, sewer and water system improvements, Adams said.

But he doesn’t want to duplicate other federal programs, said Little’s press secretary, Marissa Morrison Hyer, in an email. 

In Arkansas, lawmakers want to spend American Rescue Plan Act funds on broadband internet, Ingram said. They’ll likely push ahead with that plan, despite broadband funding in the federal bill, because the state’s needs are so great.

“In Arkansas, we could use up every nickel of the ARPA funding plus the funding from the feds,” he said.