When legislative sessions ended last year, governors and state lawmakers were braced for a prolonged recession caused by the COVID-19 pandemic. They'd frozen hiring for government jobs and cut funding for services such as education, expecting tax revenue to plummet along with the economy.
But the recession lasted just two months. State tax collections came in so much higher than expected last fiscal year - and are expected to grow so much this year - that lawmakers were able this session to restore past cuts, save money for future emergencies and spend more on everything from housing to income tax reductions.
The bonanza doesn't stop there. States are receiving more than $195 billion in additional money from the American Rescue Plan, the COVID-19 aid package signed by President Joe Biden in March.
Now, rather than fretting about a downturn, state budget writers are wondering how long the boom can last. Some lawmakers worry new spending and tax cuts this year went too far, with criticism falling along familiar partisan lines.
In Idaho, for instance, Democrats say the state may not be able to afford income tax cuts approved this year by the Republican-controlled legislature. "This perception that we're so flush and have these record surpluses has driven some revenue reductions that I think can actually cause long-term problems," said state Rep. Ilana Rubel, the assistant minority leader.
In California, Republicans say the state will struggle to pay for new programs enacted by the Democratic-controlled legislature, once federal relief dollars dry up. "The budget is not sustainable," said Assembly Member Vince Fong, vice-chair of the Assembly Budget Committee.
Forty-eight states have enacted a budget so far this year, according to the National Conference of State Legislatures, an organization that advises state legislators. Most states begin their fiscal years July 1. Lawmakers are required to pass balanced budgets in every state but Vermont.
State budget writers nationwide scrambled to match spending with expected revenues this year. The economists who advise governors and legislatures kept revising their revenue forecasts as summer approached.
Most governors released budgets in December, January and February, when COVID-19 cases were high and the economic recovery seemed fragile. Governors at the time estimated fiscal 2021 revenue would come in, on average, at 2.7% below pre-pandemic projections, according to the latest survey from the National Association of State Budget Officers, a membership group.
But as budget negotiations continued into the spring, the national COVID-19 vaccination campaign ramped up, business activity rose and budget analysts released new reports anticipating more economic and tax revenue growth.
The March COVID-19 relief package may be sending states more cash than they can easily spend, said Jared Walczak, vice president of state projects at the Tax Foundation, a conservative-leaning Washington, D.C., think tank.
"For most states, the fiscal relief in the American Rescue Plan Act is the very large cherry on top," he said. "The cherry they don't know what to do with."
Tax revenues declined in about half the states from April to December 2020, according to the Urban Institute, a left-leaning Washington, D.C., think tank. States with tourism-dependent economies, such as Nevada and Hawaii, were hit particularly hard by business shutdowns and travel restrictions. Energy-producing states such as Alaska and Wyoming were pummeled by low energy prices.
But overall, state budgets fared better than analysts expected. And some states experienced huge increases in tax collections.
"We really didn't, at any point during COVID, see a drop-off in our revenue," said Alex Adams, Idaho's chief budget officer and head of the state Division of Financial Management.
Idaho's fiscal 2021 tax revenues came in 24% higher than the prior year's, he said. "That makes that the single largest revenue growth year in state history."
California collected 20% more in personal income, sales and corporation taxes last fiscal year than it did the year before, according to the state legislative analyst's office, which advises the state legislature.
Tax revenue grew because the COVID-19 recession wasn't like past downturns. It primarily affected workers with low incomes. High earners, who pay the lion's share of income taxes, mostly kept their jobs. Stock prices rose. In California, tech companies rushed to make initial public offerings, further enriching the state's elite.
Meanwhile, Congress pumped trillions of dollars into the economy, from small business loans to stimulus checks. That helped people pay the bills and splurge on new purchases. Some laid-off workers who went on unemployment actually increased their incomes, thanks to expanded benefits.
Recent tax revenue gains - and a rosy outlook for this fiscal year - allowed lawmakers to spend big on a slew of priorities this session.
Even struggling states such as Nevada were able to increase spending this year. Although Nevada Gov. Steve Sisolak, a Democrat, in January proposed slashing $187 million from the state budget, by May economic projections showed the cuts were no longer necessary.
The American Rescue Plan further boosted state budgets.
Among other things, the behemoth $1.9 trillion federal law extended pandemic unemployment benefits, issued additional stimulus checks to middle- and low-income families, provided schools with more funds to support in-person learning and set aside $350 billion in flexible funds for states, localities, tribes and territories to use to recover from the pandemic. States get $195 billion of the cash.
States where the unemployment rate has grown by more than 2 percentage points since February 2020 will receive their entire share of the funds this year, while the rest will get half this year and the rest in 2022. All states get $500 million plus additional money based on their unemployment situation.
The money can be spent on efforts to decrease the spread of COVID-19, replace lost government revenue, help people and businesses that are struggling economically, and upgrade water, sewer and broadband infrastructure. It can't be used to pay for pensions or tax cuts.
But governors and legislators have until 2026 to spend the money, and many aren't in a rush to do so. For one thing, the funding arrived at an awkward time. The U.S. Treasury Department adopted its interim final rule on how the money can be spent and invited states to request funds in May - when lawmakers in many states already had finalized their budgets for the next fiscal year.