States should act responsibly with surpluses
State tax revenues rose 17% in August 2021 compared to the year-ago period
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In a few short weeks, governors and state legislatures across the country will begin the process of enacting their new state budgets. With historic surpluses, for many state governments, it will be a time of plenty.
How our leaders decide to use those surpluses, especially the portion resulting from unprecedented levels of federal aid, will have ramifications far beyond the next year. Down one path is permanent increases in government that will require massive new tax increases or severe cutbacks in government services in the future. Down the other path is long-overdue investments that could set the stage for long-term economic growth.
At the outset of the pandemic, concerns over state and local budget shortfalls led Congress to approve immediate aid to states and localities to backfill lost revenue and cover unanticipated expenses. The American Recovery Plan Act (ARP) enacted in March of this year provided an additional $350 billion dollars to state and local governments.
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Yet, it turns out that these concerns were overly pessimistic. According to the Urban Institute, state tax revenues rose 17% in August 2021 compared to August 2020. Strong revenues combined with unprecedented federal aid meant many states ended their fiscal years this summer with the largest surpluses in their history.
The state surplus numbers can be eye-popping and spread through the country – ranging from California ($76 billion) to Iowa ($1.5 billion) to Virginia ($2.6 billion).
Now states must decide what to do with these surpluses, including the federal aid that is available to be spent through the end of 2024. It is always tempting in a time of surplus to finance new state programs and expand existing programs. But much of the current state surpluses are the result of one-time federal aid. When those funds run out, states will be forced to either dial back their expansions or raise taxes.
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Thankfully, under the provisions of the American Rescue Plan, states have the flexibility to use this one-time surplus on one-time expenditures that are too often overlooked in state budgets, and which can lay the foundation for future economic growth and in some instances obviate the need for future tax increases.
Most states, for example, depleted their state unemployment trust funds during the pandemic and 19 states had to take out loans from the federal government. Normally these trust funds would be rebuilt - and the loans repaid - through tax increases on employers. The ARP law specifically provides that states can use remaining federal funds to repay their loans and replenish their trust funds. Doing so will ensure the state is prepared for the next economic downturn without needing to raise taxes.
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States can also use the funding for one-time investments in water and sewer projects. While the recently enacted bipartisan infrastructure bill provided over $55 billion for water and sewer programs, the documented needs across the country are significantly higher: for example, according to the EPA’s latest assessment, over $472.6 billion is needed to maintain and improve the nation’s drinking water infrastructure over the next 20 years.
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Finally, state and local governments should consider using their surpluses to finance those long-overdue, but never really prioritized, one-time upgrades to their IT systems. Recent reports have at least 12 states using COBOL – an Eisenhower-era computer language. Legacy IT systems present a greater risk for cyberattacks and administrative and technology failures clearly delayed recovery and highlighted government dysfunction. Using surpluses to finance these much-needed improvements will increase efficiency in government operations and help prepare the state and local governments to confront future challenges.
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State and local balance sheets have benefited tremendously from surprising economic conditions and the federal response to COVID. And while it is easy to spend money, spending it the right way is often a challenge. The pace of our economic recovery and our future prosperity will be influenced by whether or not our state and local officials get it right.
Tom Wickham is the senior vice president of State & Local Policy at the U.S. Chamber of Commerce, where he leads the Chamber’s work with state and local chamber partners to support and advise the business community in state-level policy work. Wickham previously served as Parliamentarian of the U.S. House of Representatives for over 25 years, providing essential guidance to House leadership, committees, and members.