It seems only yesterday that states and local governments were pleading poverty as they counted revenue losses from a coronavirus pandemic that has claimed more than 600,000 lives in the United States and cost the jobs of 1.4 million teachers and government workers.
Governors and state legislative leaders across the country appealed for federal assistance. The situation was supposedly so dire that many states would be unable to submit balanced budgets this year and next, as they are required to do.
Congress responded to these urgent cries for help by passing President Joe Biden’s $1.9 trillion stimulus bill, known as the American Rescue Plan Act (ARPA), which provided $350 billion in funding for state, local, tribal and territorial governments.
Biden signed the bill into law on March 11. Only three months later, many states are so flush with cash that Sen. Mitt Romney (R-Utah) has suggested that some of the federal money allocated to states be diverted to help fund a proposed federal infrastructure bill.
As the nation reopens from the pandemic shutdown, Congress has made no move to claw back any state aid, but the fact it’s under discussion shows how quickly economic conditions have changed.
Forty-six of the 50 states begin the 2022 fiscal year on July 1, many with bigger budgets than they had in fiscal 2020, the last year before the pandemic.
“States are in a much better fiscal situation than they anticipated,” said Erica MacKellar, a fiscal analyst with the National Conference of State Legislatures.
Many Factors Driving State Economies
Several factors have helped states exceed economic expectations.
Sales taxes, collected by 45 states and the District of Columbia, have rebounded, fueled by pent-up demand for household products, electronics and motor vehicles. Sales tax revenue also has been boosted by a 2018 Supreme Court decision in Wayfair v. South Dakota that allowed states to tax online sales, as many now do.
Bolstered by a strong stock market, incomes of wealthy Americans rose during the pandemic.
This was a boon for California and New York, which rely heavily on income taxes for revenue and impose the highest rates on the wealthiest taxpayers. California has a 13.3 percent income tax top rate and New York a 10.9 percent top rate.
Hawaii, New Jersey, Minnesota and Oregon also have income tax rates that are at or near double digits.
Colorado, Idaho, South Dakota, South Carolina and Utah posted some of the year’s biggest revenue gains.
In Kentucky, general fund receipts rose 56.7 percent compared to May of last year.
California, the most populous state with a $267 billion budget and an economy larger than all but four nations in the world, has an outsize effect on the national economy.
Last year, viewing the provisional state budget through the lens of a deepening pandemic, California Governor Gavin Newsom (D) foresaw a $54 billion shortfall and cuts in many programs.
“We are confronted with a steep and unprecedented economic crisis,” Newsom wrote in his budget.
Instead, the soaring stock market put money into wallets and portfolios of wealthy Californians, many of whom are hefty stockholders.
The resulting taxes on stock-based gains wiped out the anticipated shortfall and left Newsom quibbling with the state budget analyst on the size of the surplus.
The governor says the state will have a $75.7 billion surplus. Legislative Analyst Gabe Patek says the correct number is $38 billon.
It’s a matter of semantics, not arithmetic. Newsom, trying to fend off a recall, counts monies committed by law to be spent or saved, such as constitutionally required aid to schools.
There’s no dispute, however, that Californians benefit from the surplus, which Newsom is spending on popular programs such as $2 billion in aid for small businesses and a stimulus program that is providing one-time checks of $600 or $1,200 to poorer households.
At the other end of the continent, Florida’s record $101.5 billion budget is up 11 percent and includes bonuses for teachers, police and firefighters, money for school construction and support for the state’s lagging tourism industry.
With no state income tax, the Sunshine State makes the case for the necessity of the American Rescue Plan Act.
ARPA will provide the state of Florida with $10.23 billion, counties with $4.17 billion, metropolitan cities with $1.47 billion, and other local governments with $1.4 billion.
So thanks to ARPA, Florida is prospering despite the blows to its tourism industry.
Hawaii, 3,623 miles from the U.S. mainland and even more dependent on tourism, has been so hard hit economically by the pandemic that the Aloha State remains in a financial hole even with federal aid.
But ARPA helped Hawaii to avoid state government layoffs, furloughs and pay cuts that had been predicted by Governor David Ige (D). It also will enable the state to repay principal and interest on loans from the federal government that helped cover unemployment benefits for jobless workers.
States Need Multi-Year ARPA Perspective
A webinar hosted on May 25 by the Pew Charitable Trusts urged states to take a multi-year perspective in use of ARPA funds, pointing out that some states fell off the “fiscal cliff” when federal stimulus funds expired after the Great Recession of 2007-2009.
States would be wise not to use federal funds on on-going programs such as Medicaid, said Pew health expert Adam Levin.
When looking to prop up state economies, Levin recommended targeting distressed sectors, such as tourism and hospitality, with short-term, immediate support.
The importance of broadband access also was stressed at the Pew webinar. As of May, nearly forty governors had announced broadband initiatives, many of them targeted to underserved communities.
In Recovery, Not All Created Equal
As the economy has roared from the pandemic recession, the recovery has been unequally distributed
At the end of May more than 9.3 million Americans remained unemployed, and the nation had a jobless rate of 5.8 percent with higher rates for Hispanics and Blacks.
The website WalletHub, noting that U.S. economic growth depends heavily on the performance of individual states, compared all 50 states and the District of Columbia on 29 key indicators of economic performance from GDP growth to startup activity to the share of jobs in high-tech industries.
WalletHub found huge differences between the economic performances of the best and worst performing states.
The top six states were Utah, Washington, California, Massachusetts, Idaho and Colorado.
The bottom six, with the worst economy listed first, were Hawaii, West Virginia, Louisiana, Alaska, Oklahoma and Kentucky.
Restaurant and hospitality employees have been notably slow to return to work, which Republicans blame on extended federal unemployment benefits.
Twenty-five governors, all but one of them Republican, have acted to cut off the federal extension of unemployment benefits in June or July. They are otherwise due to expire on Labor Day.
As Governor Larry Hogan (R) of Maryland said in a typical comment: “While these federal programs provided important temporary relief, jobs and vaccines are now in good supply. And we have a critical problem where businesses across our state are trying to hire more people, but many are facing severe worker shortages.”
Many economists and analysts have cited other factors that may have prevented people from going back to work, including lack of child care and fear of contracting COVID-19.
The Economist noted that Australia had reduced unemployment insurance without seeing any improvement in the job market.
Overall, the U.S. economic rebound from the pandemic has been remarkable, but it couldn’t have been done by enterprising businesses alone.
Starting with passage of the bipartisan Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020, Congress has enacted six major bills, costing about $5.3 trillion, to help manage the pandemic and mitigate the economic burden on families and businesses.
That’s a lot of stimulus — and it’s paying dividends to the states and to the American people.
Utah’s Economy Weathering Pandemic Far Better than Hawaii’s
Utah currently has the best-performing economy and Hawaii has the worst-performing economy in the nation, according to analysis by WalletHub. WalletHub compared all 50 states and the District of Columbia on the basis of 29 key indicators, including GDP growth and employment rate. Utah ranked first in both of those categories, while Hawaii ranked last in both.