New research for fiscal year 2020 shows pandemic-related relief aid increased the proportion of state revenues coming from the federal government to the highest levels on record.
Those were the findings of a report from Pew Research released Thursday. The findings reflect the extraordinary measures taken by the federal government as the coronavirus pandemic slowed many state economies to a crawl.
“Pandemic relief aid increased the portion of state government revenue coming from federal dollars to nearly 36% in fiscal year 2020, the highest level on record,” the Pew report said. “The federal share of revenue hit new highs in most states.”
Federal aid from The Coronavirus Aid Relief and Economic Security Act of 2020 allocated $150 billion to states and local governments in fiscal year 2020, and the Pew Research report shows where each state’s revenue came from.
“Where states get their money is important for state policymakers to understand since it illuminates the mix of resources that each state depends on to deliver public services and accomplish policy priorities and how any changes in those revenue sources can really affect state budgets,” said Justin Theal, officer, state fiscal health at The Pew Charitable Trusts.
Federal aid is typically the second-largest source of income for states, according to Theal. But the federal aid states and local governments received in 2020 not only made up for lost revenues and those spent on pandemic response, but in many states surpassed typical revenue generators such as taxes, service charges and local funds to become the largest sources of revenue.
“Federal funds were the largest source of dollars in 18 states, up from just four states a year earlier,” the Pew report said. “Taxes remain the largest revenue source in the other 32 states and overall, at 45.8% of state revenue.”
States where the proportion of federal funds surpassed 50% of state revenue include Alaska, Wyoming, South Dakota and Louisiana. States where the proportion of federal funds exceeded 40% include Tennessee, Idaho, Maine, Vermont, Arizona, Montana, Kentucky, Mississippi, West Virginia, Missouri, Alabama, Rhode Island, New Mexico and New Hampshire.
“In the past, the aid has been much more targeted and limited,” Theal said. “In this case, much of the federal aid has had relatively loose conditions attached to it.”
States typically receive more federal aid in times of economic recession, Theal said, but even then, the conditions of recent rounds of federal aid is unprecedented. For example, states are permitted to use these federal dollars to replace revenue, which wasn’t a condition of the federal aid states received during the global financial crisis. The speed in which states received such funding was also unprecedented, Theal said.
The Pew report only highlights funding levels for fiscal year 2020, but with The American Rescue Plan passed at the end of 2020, figures for upcoming years will largely follow the same trend.
“It’s fair to say that the share of state revenue coming from federal dollars will continue to increase in fiscal 21 and remain relatively high over the next couple of years,” Theal said.
“It’s important that state policymakers recognize that the federal COVID relief dollars are one-time money with a very specific expiration date,” Theal said. “They should not be used to fund new recurring commitments like permanent tax cuts or major spending programs,” he added. “If they do, states will face a fiscal cliff when that federal dollars eventually dry up.”
Under the American Rescue Plan, states have until 2024 to decide how to spend the federal aid and until 2026 to spend it.