Many states began preparing for terrible financial outcomes during the early days of the COVID-19 pandemic. As lockdowns swept the nation, estimates on tax collection and revenue were not positive. The immediate impact on economic activity was clear enough. Many signs seemed to indicate a prolonged recovery was possible. States began to worry about facing a fiscal cliff of sorts. In short, they would be unable to meet their ongoing financial obligations due to lower than expected tax revenue.
Interestingly enough, that didn’t come to pass. Between faster than projected return of many industries and massive federal stimulus packages, states actually have historic revenue increases. As a result, states are going to have to make important decisions. How they decide to spend tremendous amounts of one-time money will be critical to their future financial health. And their decisions on how to allocate their budgets now will have long range consequences. It may push them over that fiscal cliff after all.
ISEG Executive Director weighs in on how states can avoid going over a fiscal cliff
On December 1, 2021, Dr. Ted Bolema, Executive Director of the Institute for the Study of Economic Growth (ISEG), and Dr. Eileen Norcross, Vice President of Policy Research and Senior Research Fellow at the Mercatus Center, published an article on the impact of federal stimulus dollars on individual states budgets.
Here’s an excerpt from the article:
After bottoming out in the spring of 2020, state revenues have been climbing ever since. Fiscal exuberance now fills the air. Some governors are signing the biggest budgets and recording their states’ largest revenue increases in history. State revenues are on average 19% higher than they were at the same time last year. On paper, state and local balance sheets are looking better than they have in a long time.
But behind the euphoria is a real concern: This isn’t normal. A portion of this boost is due to about $5 trillion in federal stimulus infusions into consumers’ pockets, small-business balance sheets, and state budgets. What happens once federal transfers recede?
Read the whole article at the Washington Examiner or Colorado Springs Gazette.
