Despite the rebounding economy and aid spending still in the pipeline, President Biden and congressional Democrats are pressing to pass another $1.9 trillion stimulus bill. In general, the bill is not needed, but the most wasteful part is $500 billion in further subsidies for the states.
Last year, when the economy went into shutdown, it appeared that state and local governments would suffer budget holes as tax revenues fell. For months, the media blared that the states faced a”dire fiscal crisis.” In response, Congress passed rounds of aid to governments, totaling at least $360 billion. By the fall, however, it was clear that the economy was recovering strongly and that tax revenues in the states were rising. Nationwide, state and local tax revenues fell 5% in the second quarter of 2020, but they more than made up for lost ground in the third and fourth quarters, according to data from the Bureau of Economic Analysis.
For calendar year 2020, state and local tax revenues were up 1% over 2019 despite the economic downturn. Looking at the three largest revenue sources, sales taxes dipped a bit for the year, but personal income and property tax revenues increased.
An early clue that the media’s fiscal apocalypse narrative was off-base was that housing prices rose steadily during 2020. This is noteworthy because 70% of local government tax revenues come from property taxes. The New York Times story called “The Recession is About to Slam Cities” was maybe true for a few cities with oppressive lockdowns, but it was not true for most cities and counties across the nation. Nationwide, fourth-quarter single-family home prices were up 15% over a year earlier. A Wall Street Journal article titled “U.S. States Face Biggest Cash Crisis Since the Great Depression” was also malarkey. By the third quarter of 2020, Bureau of Economy Analysis data showed that state and local tax revenues had already bounced back to pre-pandemic levels. Furthermore, the hundreds of billions of dollars of emergency federal aid flowing into state coffers far exceeded the second-quarter dip in tax revenues.
Today, the mythical “cash crisis” is turning into a cash surge for some states, including California. Revenues are filling Golden State coffers as the technology industry and the top 1% who pay half of the state’s income taxes ride high. The state’s Legislative Analyst’s Office is calling it a state budget “windfall.”
It is true that some states that rely on the energy and vacation industries face budget challenges, and Texas has been hammered by a costly winter storm. But states should plan for unexpected crises and build large reserve funds to handle budget gaps. Going into 2020, some states, including California, had built large rainy day funds, while others, such as Illinois and New Jersey, had saved nothing after a decadelong economic expansion. The former types of states do not need more cash from Washington, while the latter types do not deserve it.
Still, the economic outlook is good news for all states. The Congressional Budget Office projects that real gross domestic product will rise a strong 4.6% in 2021. As GDP rises, household and business incomes will grow, and state income and sales tax revenues will increase. Meanwhile, housing prices are expected to remain strong, which will support local government budgets with buoyant property tax revenues.
It is understandable that Biden wants to show that he is doing something to fix the economy and help people. But hiking up government borrowing could destabilize the economy and harm everyone down the road if it leads to higher inflation, interest rates, and taxes. The president has suggested that his $15 minimum wage could be set aside for now, and he should show similar moderation on spending by dropping the plan for more state bailouts.
Chris Edwards is the director of tax policy studies and the editor of DownsizingGovernment.org at the Cato Institute.