Capitol Correspondence - 07.13.21

Big Picture: Once Financially Strained, Many States Now Benefiting from Fiscal Windfalls

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We share this reporting by Politico because states’ broader financial gains affect the fiscal climate in which Medicaid is funded, given that it is a state-federal partnership. This information could be beneficial to our members as they advocate for their Medicaid-funded programs.

“As the coronavirus tore across America last spring, elected leaders and economists feared the worst: the pandemic and resulting financial turmoil would devastate the budgets of states across the nation. Governors pleaded with Washington for a massive bailout. States borrowed billions to close the gap. And Mitch McConnell told them all to go bankrupt.

Now, cash is raining down on state capitals as the economy rebounds faster than virtually anyone expected.

The rich got richer as the stock market boomed. Businesses are begging workers to come back, juicing pay and raising prices to cover the costs. And Congress, in the end, did come through with a mountain of aid meant to plug deficits from Honolulu to Augusta.

Governors and lawmakers, who months ago thought they would be making deep cuts to their budgets, are instead facing the very unusual problem of how to spend bundles of money. These state leaders, emboldened by the brighter tax revenues and the hundreds of billions of dollars provided by the federal government, are launching transportation projects, cutting stimulus checks and even paying down debt.


That’s not to say the needs weren’t significant, or that every state has since seen the same surge in revenue. All incurred massive costs from the pandemic, and the need for social programs only increased as the poorest Americans were hit the hardest.

But from coast to coast, governors and lawmakers who were preparing to make difficult, politically-challenging moves are now faced with a surprise windfall. This is leading to partisan and intraparty feuds in statehouses over what to spend the cash on, and when, and setting up kitchen-table debates over what’s more important: Spending money now to boost the economy or saving for future problems.


States sharply reduced their revenue forecasts when the pandemic hit, some by as much as 20 percent, according to Brian Sigritz, director of state fiscal studies at the National Association of State Budget Officers. Since that time, cash collections have come in above forecasts in nearly all instances, he said.

Then multiple rounds of federal stimulus funding were successful in lifting up the nation’s economy, and in turn, helping states stabilize and even increase tax collections. Direct and indirect aid to states came on top of that. In all, states and localities saw some $350 billion in direct aid from the American Rescue Plan that must be spent by the end of 2024, plus additional aid to support schools and vaccine distribution.

The pandemic also exposed some tough truths: the turmoil disproportionately hurt low-wage workers, who pay much less into the states’ tax coffers, while middle- and high-income earners fared much better, resulting in the better than anticipated tax receipts for 2020 and a strong rebound this year.


To be sure, not all states are in such a rosy position. Places that are highly reliant on tourism, like Nevada and Hawaii, were hit harder than most other states. According to the Urban Institute, from the time period of April 2020 through March 2021, actual revenue collections are still below what they were a year earlier in 17 states.”