States Pull Back on Their Spending Sprees. NewsWire

NewsWire: 9/22/22

• The excess revenue states collected during the pandemic has triggered a frenzy of tax cuts. But what will they do if the economy gets worse? (Bloomberg)
• NH: When we last reported on states’ largesse in July, only around 10 states had announced a plan to pass on the excess revenue to residents. (See “Cash-Flush States Offer "Inflation Relief.") But as of the end of August, the number of states passing some form of tax relief has jumped to 33.

• Some, including California, Illinois, and Virginia, are sending out checks. Others, like Georgia and Tennessee, have suspended taxes on everyday expenses like groceries and gas. Massachusetts owes taxpayers $3B thanks to an obscure law that requires the state to refund taxpayers when revenue growth outpaces wage growth, which was triggered this year from the first time since 1987.
• But as we predicted in our last piece, some states are already seeing warning signs as the economy lurches towards recession. Earlier this year, the New York governor’s office unveiled budget plans that relied on a large surplus to fund increased spending on schools, health care, and infrastructure. Officials predicted a balanced budget through 2027.
• But with income tax projections sharply down, New York is now predicting a $310M shortfall for the next fiscal year. This will balloon to $6.2B by 2027 if the current rate of spending continues.
• In California, too, income tax collections are falling short of expectations. The state has collected 11% less tax revenue so far this year than officials forecasted. One budget analyst predicted that the state ultimately will end up $5.5B short of projections for the fiscal year ending in June 2023.
• To be sure, neither of these states are in danger of going broke. Both California and New York also used some of their extra revenue to build up their rainy-day funds. But their big plans for new spending are in doubt.
• All this extra state spending is, for the moment, partially counteracting the fiscal contraction that's happening at the federal level. States are implementing expansionary fiscal policies at a time when the federal government is moving from deficit to surplus at a historically fast pace. In 2020, the federal deficit as a share of GDP was around 15%. In 2022, it will be under 5%--for a contraction of more than 10 percentage points of GDP in just two years.
• Thus, in the near term, the state giveaways are helping to shield the macro economy from the current contraction in federal spending. And this, in turn, is perhaps delaying the coming recession.