Trendspotting: State Budgets Experience Unexpected Surpluses

NewsWire: 4/27/21

• Many states that prepared for fiscal disaster thanks to the pandemic are instead seeing budget surpluses. Both federal aid and the weird trajectory of the recent recession have helped shore up state budgets. (The Economist)
• NH: Utah’s state budget is projected to have a $1.5B surplus for 2021. And the Beehive State isn’t alone. California, Idaho, Missouri, and Vermont will also run surpluses. Fully 22 states experienced YoY revenue growth in 2020.
• In previous recessions, states have struggled to balance their books. Typically, with a tumbling economy, taxable income falls, taxable sales fall, and taxable property values fall. So how did so many states experience revenue growth? As I’ve written before: This wasn’t a typical recession. (See “Small Businesses Struggle to Fill Jobs.”) 
• In 2020, monthly personal income totally recovered--and then some--from the March dip by April. Retail sales were above the pre-pandemic trend by June. Home prices soared in most areas. And as for financial gains, well, you all know how fabulously those have been doing.
• That's not all. An unprecedented avalanche of federal aid has further helped to fill states coffers. And while the federal government paid for the additional unemployment insurance, many state governments were able to tax those benefits. The stimulus generated an epic retail comeback, with ecommerce soaring. And that too was good news for state sales taxes. Remember, the 2018 Supreme Court case South Dakota v. Wayfair, Inc. established that states could tax sellers even if the vendor didn't have a physical location in the state. 
• Aid to states began with the CARES Act a year ago. But this year Biden’s American Rescue Plan allocated an additional $195B to state governments.
• Not all states have fared equally well. States with the most progressive tax structures, like California, have come out way ahead. But Florida, Hawaii, and Nevada experienced large revenue drops due to disappearing tourism. And North Dakota and Texas experienced large drops due to falling oil prices. 
• As we move forward, if federal aid to state governments continues at all, I suspect that it will be more targeted to states in need. While Utah doesn’t need much help, Alaska still does.