Many state lawmakers discovered that they had too much money when they started their 2022 session this spring. The long-term consequences of what lawmakers do with this extra cash could be devastating.
A convergence of two wins resulted is an excess in revenue. As the pandemic subsided, state tax collection rose dramatically in 2021. Businesses reopened fully and people started spending again. The federal government also gave $360 billion to states as part of its $1.9 trillion American Rescue Plan. This plan was passed in March 2021. With President Joe Biden’s $1 Trillion infrastructure bill passed, more federal money will be available to the states for their treasuries.
According to the data of Pew Charitable Trusts, total state revenue (including federal funds), increased by over 12 percent between 2021 and 2023. According to the National Association of State Budget Officers, 32 states had higher revenue than anticipated in 2021.
Many states are now experiencing significant budget surpluses year over year for the current financial year. California leads the way with a $31 billion surplus—an amount larger than many states’ entire annual budgets. Large cash reserves are also available in Florida (with an 11.2 billion surplus), Maryland (4.56 billion), Minnesota (7.7 billion), Virginia (2.26 billion) and Virginia (3.26 billion). State lawmakers need to be cautious about not letting this extra cash go to waste.
Josh Goodman (a senior officer at Pew’s fiscal health initiative for states) says that it is understandable that people are looking to cut taxes or create new programs. The impulse to use surpluses for pet projects, Goodman says, ignores data that suggest many states are running long-term structural deficits—largely due to pension obligations and health care costs in programs like Medicaid. Goodman says that the question isn’t about the current budget situation, but rather what budget-situation will be in the future five to 10 years from now.
California Gov. Gavin Newsom, Governor of New York Both Democrats Kathy Hochul and Gavin Newsom have laid out plans to increase spending on education and other social programs. They also plan to reserve some revenue for the future in a reserve fund.
You can also return the excess to tax payers through temporary tax breaks. Florida Gov. Ron DeSantis (a Republican) has suggested using $1 billion from the state’s surplus for a gas tax exemption to state drivers despite unusually high fuel prices.
For the federal government, there’s a lesson to be learned from the next national economic crisis: the states do not need bailouts.