WASHINGTON – From California to Virginia, many states facing devastating deficits in the depths of the pandemic recession are flush with tax revenues due to a recovering economy and rapid stock market. Legislators worried about budget cuts are now proposing lucrative increases in school spending, tax cuts and direct payments to their residents.
This turnaround is due in part to strong income tax revenues, especially in states where high earners and the wealthy whose finances have done well during the crisis are heavily taxed. The unexpectedly rosy picture puts pressure on President Biden to reuse hundreds of billions of dollars in federal aid approved this year to help fund a potential bipartisan infrastructure deal.
Last week, Senator Mitt Romney, Republican of Utah, suggested that Mr. Biden and the Republican negotiators consider “some of the funds already transferred to states as part of the last bills” to help pay for this deal . “You don’t know how to use it,” said Mr. Romney. “With this money they could finance part of the infrastructure for roads, bridges and transit.”
Some economists and budget experts support this push, arguing that the money could be better spent elsewhere and that states’ spending plans could increase the risk of a rapid outbreak of inflation across the country. Other researchers and local budget officials say federal aid is rescuing hard-hit cities and states like New York City and Hawaii from a cascade of layoffs and spending cuts.
Biden government officials say they continue to support the distribution of the full $ 350 billion of state, local and tribal aid included in the $ 1.9 trillion economic aid package that Mr Biden signed in March. They say the aid will help prevent the economic recovery from repeating the years of government and local budget cuts following the 2008 financial crisis, which slowed recovery from the recession and helped millions of Americans wait for theirs for years To take advantage of.
“We still firmly believe that the state and local plan is critical to having a strong insurance policy for the kind of strong growth we want, the kind of equitable rest the country deserves,” he said Gene Sperling, a senior advisor to Mr. Biden, who oversees the fulfillment of the aid package in March, said in an interview, “And to get back of the 1.3 million jobs lost at the state and local levels.”
Even if the administration wanted to get the funds back or diverted, it is unlikely that they could reuse the money or make significant changes to its use without Congress action.
The state and local funding debate comes as Mr Biden leads a critical week of infrastructure negotiations with Republicans in search of a deal and prepares to travel to Cleveland on Thursday to discuss the economy. Paying for new expenses is a major hurdle in the talks as Mr Biden pushes to raise taxes for corporations and Republicans who prefer higher usage fees like the gas tax.
Reusing unspent funds could help move an agreement forward, especially given Republican opposition to state aid funding in previous bailouts. The Democrats pushed for lucrative financial aid to states, cities and tribes to be included in Mr Biden’s bailout bill. Republicans fought these efforts, warning that they would act as a “bailout” for liberal states with high taxes and high spending. They also cited a number of predictions by Wall Street firms and other analysts that many states’ revenues were doing better than officials feared in the first few months of the pandemic.
It increasingly looks as if many liberal states will not be “saved” – but also that some of them will no longer need federal money. This is especially true for countries whose tax revenues are not primarily dependent on the tourism or hospitality industry. Those with advanced tax systems who have generated increasing income from capital gains from wealthy residents – like the Silicon Valley moguls – are also doing well.
California authorities expect a $ 15 billion surplus this fiscal year after fearing a $ 54 billion shortfall. Virginia generated nearly $ 2 billion in unexpected revenue. So is Oregon, where economists recently switched the state’s revenue projections from projected deficits to surpluses in a report that surprised and delighted many lawmakers.
“It’s extremely surprising,” said Mark McMullen, Oregon state economist.
“When the stalemate first hit and we saw these catastrophic job losses, we naturally treated them as a normal recession in our projections,” he said.
But rising income tax revenues and multiple rounds of federal aid have now brought the state “above our predictions for prepandemic,” added McMullen.
The strong income comes from the fact that more federal aid is only just rolling out the door. The Treasury Department started sending funds to states this month and has so far distributed more than $ 100 billion – about half of what is available for immediate disbursement. The remainder is expected to come from local governments over the next year, although states where unemployment is still rising sharply will receive a flat rate right away.
The Federal Responsible Budget Committee estimates that state and local governments totaled nearly $ 1 trillion in aid over the past year. State and local revenues were about 7 percent above their prepandemic levels last quarter – excluding the federal grants they received.
Marc Goldwein, the committee’s senior policy director, said that states like Hawaii and Nevada, which are heavily reliant on tourism, clearly need support, but that for many others the money is unnecessary.
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The reasons vary, but Mr Goldwein noted that property values have risen across the country and property taxes have increased. that states struggling with falling oil prices have seen those prices rise; and that consumers are spending at a healthy price thanks to stimulus checks and enhanced unemployment benefits.
“State and local governments are by and large openly swimming in revenue,” said Goldwein. “It’s pretty clear to me that we’ve spent a lot of money on countries we didn’t need.”
Some economists, like Harvards Lawrence H. Summers, a former Treasury Secretary under President Bill Clinton, have urged Mr. Biden to reuse state and local aid on longer-term infrastructure projects in hopes of facilitating what Mr. Summers warns is dangerous construction from inflationary pressures. Administrative officials consider high inflation to be a much lower risk than Mr Summers.
Other analysts warn that the budget situation could turn sour if the stock market falls sharply or economic growth falters. Many cities like New York are struggling with sluggish tax revenues and still rely on federal agencies to avoid further layoffs.
New York expects to receive more than $ 22 billion in Covid-19 federal aid, according to the non-partisan participatory budgeting commission. Despite the funds, the city continues to expect budget gaps in the coming years due to declining income such as property taxes.
In hindsight, said Lucy Dadayan, a senior research fellow at the Tax Policy Center, the March Act should have included “more targeted funding” for the states and cities that need it most.
“I would still be all for helping state and local governments – more local governments than state governments, given what we know,” said Ms. Dadayan.
Treasury officials say the Biden government wants states to have sufficient resources to meet immediate costs related to creating the pandemic and to be able to pay for more comprehensive services to those hardest hit To help people.
However, many states and cities have plans for expenses that go well beyond repairing their safety nets. California Governor Gavin Newsom, a Democrat facing a recall vote, has proposed a number of spending increases, including $ 1,100 stimulus checks for individuals and tax credits for filmmakers.
In Florida, the sales forecast for 2021 was revised upwards twice last year. The state is now expected to receive $ 8.8 billion from the federal government. Ben Watkins, director of the Florida Division of Bond Finance, said the state used the aid money to invest in infrastructure and water quality projects and to allocate some of its excess funds to preparing for hurricanes.
He described the gust of wind as staggering.
“It’s a good problem,” said Watkins, “but that doesn’t mean it’s not an exaggeration.”
States have considerable leeway in using the money, although they are prohibited from using the funds to subsidize tax cuts. Several Republican-led states have sued the Treasury Department, arguing that the restriction violates state sovereignty.
The lawsuits do not appear to be slowing the delivery of funds. Ohio failed to win an injunction preventing restrictions from being enforced that month, and Missouri had its case tried out of court after a federal judge said the state had failed to show the law harmed it.
The Treasury Department plans to closely monitor how the money is being spent and whether states are using budget gimmicks to actually fund tax cuts. The agency claims that the federal government has the right to set conditions for the use of federal funds and that states can refuse the money. An official from the Treasury Department said no state has yet announced that it will refuse the funds.
In the meantime, countries with high turnover are pushing ahead with their plans. Nebraska approved a $ 26 million corporate tax cut last week, and lawmakers told The Omaha World-Herald that they believe they will be complying with the law if they put federal funds in any of the General Fund’s State separate account.
Nicholas Fandos and Dana Goldstein contributed to the coverage.