In states across the country, legislators who once stared into a terrifying abyss of red ink now face an embarrassment of riches, funded by a booming stock market, rising wages for those at the upper end of the economic stratosphere and what economists say is an unprecedented shift in the way consumers are spending their money.
Budget cycles differ by state, and legislators everywhere are in different stages of arranging their fiscal houses.
But the trends are clear: Minnesota, which once faced a $1.3 billion deficit, now expects a $1.6 billion surplus. Michigan budget figures earlier this year showed a $2.5 billion surplus. Connecticut’s surplus was estimated at $70 million in January, and $130 million by March.
Colorado’s surplus stands north of $5 billion. Rhode Island will have an extra $44 million to play with. Oregon’s tax revenue came in so far ahead of expectations that the state is expecting to shell out more than $500 million in refunds to taxpayers, a provision in state law known as the “kicker.”
The catastrophe avoided comes in part from a stock market that has exploded during the pandemic. The S&P 500 index is up 81 percent since its nadir on March 20, 2020. The Dow Jones Industrial Average is up 76 percent over the same period. Capital gains from those advances have helped make up for lost revenue growth; in states like California, specific initial public offerings from companies like DoorDash and Airbnb provided their own unique boosts.
State residents also played a role in boosting state revenue. With most service businesses shuttered, consumer spending shifted to goods, especially through e-commerce. A 2018 Supreme Court decision forcing online retailers to collect state sales tax, South Dakota v. Wayfair, meant a sustained infusion of cash headed to state coffers.
Federal expansion of unemployment benefits, first through the $2.2 trillion CARES Act signed by then-President Trump and then again through President Biden’s $1.9 trillion American Rescue Plan, meant even the millions who were unemployed by the pandemic could keep spending.
“Sales tax was a surprise for many states because people, even those who lost their jobs, were still getting unemployment insurance and they could still spend money,” said Lucy Dadayan, a senior researcher at the Urban-Brookings Tax Policy Center who specializes in state budgets. “If the pandemic-induced recession happened prior to Wayfair, the situation might have been very different but the online sales taxation helped a lot.”