Feb 21, 2023 - Economy

Economic tailwind from flush states

Illustration of a hundred dollar bill folded like a roadmap with navigation points dropped around it.

Illustration: Aïda Amer/Axios

State and local governments are facing very different circumstances than they did during the yearslong slog that followed the Great Recession: They are swimming in cash.

Why it matters: State lawmakers have begun to hash out budget plans for this fiscal year. There are exceptions — California being one — but for the most part, state coffers are fat and generally finances are in good shape. That enables state-level spending to help keep growth humming.

Federal Reserve chair Jerome Powell acknowledged this tailwind as one reason why the economy will continue to grow this year.

  • "State and local governments are really flush these days ... and many of them are considering tax cuts or even sending checks," Powell said at a press conference earlier this month.

By the numbers: In nominal dollars, states' total balances — a tally of rainy day funds and other reserves — have roughly tripled over the past two years, according to a report by the National Association of State Budget Officers released last month.

  • Total balance levels are expected to decline somewhat in the most recent fiscal year, from a record $343 billion reached in the prior year. That reflects "plans to spend down a portion of their larger-than-expected ending balances ... including for one-time investments."

What they're saying: "Reserves are at an all-time high in many states, and budgetary liabilities have been paid down — or even eliminated," Fitch Ratings' Eric Kim said at a recent event, hosted by the Volcker Alliance and the Penn Institute for Urban Research.

  • By Kim's count, more than 30 states made tax policy changes last year, as income tax and sales tax receipts soared. At least 17 governors have done the same so far this year.
  • That includes proposals for one-time tax rebates in states including New Mexico and Georgia. In South Dakota, lawmakers are mulling using the state's budget surplus to eliminate the sales tax charged on groceries.

Flashback: In the aftermath of the 2008 crisis, state finances came under stress and miserable conditions lingered, with revenues plunging. To plug the hole, there were deep cuts to state programs.

  • Following the pandemic-induced recession, conditions were generally the opposite. Tax revenues soared, helped in recent months by pricier goods that have buoyed sales tax revenues.
  • State and local municipalities received historic support from government aid packages, some of which haven't been fully spent yet.

What to watch: State officials are paring back expectations for tax revenues, bracing for an economic slowdown.

  • New York and California are preparing for a decline in personal income tax receipts, thanks in part to the slowdown in activity in the technology sector and on Wall Street.
  • "It's not entirely clear yet whether California or New York are the leading edge, or outliers because of some aspects of their economy. We are still seeing steady revenue growth across most other states right now, " says Kim.
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