Unprecedented federal borrowing floods state budgets

Once per calendar quarter, the state of Michigan conducts a Consensus Revenue Estimating Conference that provides updates on both the national and state economies and the state’s fiscal outlook. The May conference each year is especially significant because it sets the official revenue targets for the next fiscal year’s state budget. 

The May meeting packet contained a broad range of data points, but a few jumped out.

First was a comparison of major U.S. fiscal stimulus plans over the past century. The three COVID-19 stimulus plans of the past year have combined to cost an amount equal to 22.9 percent of U.S. gross domestic product. By that measurement, this is almost twice the size of Franklin Roosevelt’s New Deal, roughly four times former President Obama’s stimulus plan during the Great Recession, and nearly 4.5 times that of the Marshall Plan that rebuilt Western Europe after World War II.

Next was the dramatic surge of federal transfer payments over the past year. Between 1974 and 2008, transfer payments gradually rose from 10 to 15 percent of U.S. total personal income. Following the Obama stimulus, transfer payments settled in the 17 to 18 percent range. But the COVID-19 pandemic brought on a historically unprecedented spike; transfer payments stood at 27.6 percent in the first quarter of 2021.

Another chart broke down the components of personal income. Over the previous four quarters, personal income was nearly $3,000 higher than pre-pandemic forecasts had expected. However, employee compensation actually declined by about half that amount. The entire increase is the result of the 53 percent increase in federal transfer payments that have floated U.S. households over the past year.

In Michigan, wage and salary income fell 3.6 percent last year, but state income tax withholding rose 5.7 percent — the second highest increase in the last decade. Our state’s general and school aid funds for the current fiscal year are each forecast to realize billion-dollar growth above what had been estimated four months earlier. Between them, they’re expected to grow another $1.5 billion next year. This even though Michigan’s income and sales tax collections are supposed to be flat next year, and last year’s employment loss is not expected to be fully recovered until 2024, at the earliest.

And Michigan is not an outlier. Oregon recently boosted its revenue estimates by $1.18 billion for its current budget, $1.25 billion for the next biennium, and $1.64 billion for the 2023-25 budget. Skyrocketing state revenues have triggered constitutional provisions that will rebate $1.4 billion against next year’s individual income taxes and $664 million against next year’s corporate income taxes.

At the end of April, Connecticut increased its forecast of tax receipts for the next two years by $1.64 billion. Three weeks later, the state’s current year budget surplus was raised by $220 million, with sales, corporation, estate taxes and income tax withholding constituting the lion’s share of the increase.

Texas’s comptroller recently raised his state’s revenue estimate by $1.67 billion for the current fiscal year and by $3.12 billion for the 2022-23 biennium. California is debating how to spend a barely fathomable $38 billion surplus that Gov. Gavin Newsom originally announced as twice that amount.

Of particular note is that none of these windfall or surplus announcements include the state bailout funds each state is receiving under the American Rescue Plan Act.

The evidence from across the country is conclusive: The first two rounds of direct relief payments to individuals and businesses were sufficient to stabilize the economy.

At best, the American Rescue Plan Act was unnecessary. A worse and more likely scenario is that larding hundreds of billions of federally borrowed dollars onto state governments will enable ill-conceived spending that costs taxpayers twice — once for higher federal debt payments and again for ongoing spending paid for initially with one-time funds. The upcoming federal infrastructure spending package figures to compound the problem.

David Guenthner is the senior strategist for state affairs at the Mackinac Center for Public Policy, a research and educational institute located in Midland, Mich.