Where State Money Can Come From

The Congress has mandated that states and territories receiving “Fiscal Recovery Funds” from the American Rescue Plan cannot use the money, directly or indirectly, to offset tax cuts. Instead, those funds are supposed to lessen the pandemic’s economic harm. The money can fund bonus pay for essential workers, restore public services, and boost broadband, water, and sewer investments.

Those federal funds will join normal state revenue. So let’s take a look.

State Revenue

States get close to 80 percent of their money from taxes and federal funds. Taxes provide the most funding in 46 states while just four states–Alaska, Louisiana, Montana and Wyoming–get more money from the federal government.

State Revenue By Source: 2019:

Next, we can ask how tax dollars differ. As you might expect, a majority of states depend on their personal income tax. But for 16 states, the sales tax is more important.

State Revenue by Tax Mix, 2020:

Our Bottom Line: Fiscal Policy

Defined as a state’s (or any government’s) spending, taxing, and borrowing, fiscal policy takes us straight to the economic role of government. But it is not simply more or less. As we have seen with the pandemic, the destination matters. One goal was the robust recovery that state spending could stimulate.

As economists, the recovery takes us to aggregate demand (AD). On this AD/AS (aggregate demand/aggregate supply) graph, AD is composed of consumer spending, business investment (includes construction, research, and also residential housing), government spending, and net exports. Trillions of dollars of government spending shifts the AD line to the right and boosts growth as it increases real GDP:

Through our AD/AS graph, you can see the importance of boosting state revenue.

My sources and more: The CBPP (Center on Budget and Policy Priorities) summarizes the destination of the American Rescue Plan’s State and Local Recovery Funds. Then, together with Pew’s infographics, we can see the sources of state spending. And finally, this NBER paper looked at who got what and why.