States confront tough budget choices as federal pandemic relief dries up

States across the U.S. face budget crunches as billions of dollars in federal pandemic relief funds sunset at the end of the year.

Raising taxes, slashing spending and raiding rainy day funds are all on the table for states dealing with revenue shortfalls now that the influx of federal taxpayer cash is expiring.

In Democratic-run Maryland, the General Assembly was scrambling to reach a budget deal by a Monday deadline after the Senate and Gov. Wes Moore rejected $1.3 billion in tax and fee increases proposed by the House of Delegates.

The state faces soaring deficits to pay for education and transportation projects. The legislature has to pass a $63 billion budget — about $1 billion smaller than last year — by the end of the legislative session on April 8.

Josh Goodman, a senior adviser of state fiscal health at Pew Charitable Trusts, said states must confront what returning to a fiscal normal looks like.

“One of the big questions for states that do have problems, which isn’t all of them right now, at least on a short-term basis is: Do we want to use our reserves,” Mr. Goodman said. “Do we want to cut spending? Do we want to increase revenue?”

Arizona Gov. Katie Hobbs, a Democrat, and the Republican-run Legislature are locked in a drawn-out budget fight over resolving a $2 billion shortfall. Ms. Hobbs’ initial plan, which Republicans rejected, included slashing the state’s school voucher program.

California Gov. Gavin Newsom’s $291.5 billion budget proposal reduces spending by about 9.6% to make up an expected $38 billion budget shortfall without raising taxes. Mr. Newsom, a Democrat, wants to use about $12 billion from California’s rainy day fund to maintain priority programs such as covering illegal immigrants under the state’s Medicaid plan.

He also wants to defer spending on other programs, such as a pledge for a 5% annual increase to base funding for state colleges and universities.

“It’s a story of correction, a story of normalization after a period of a tremendous amount of distortion,” Mr. Newsom said of his budget plan.

The “distortion” is a side effect of revenue softening during the early years of the COVID-19 pandemic as billions of dollars in federal aid flooded state coffers.

In other states, the budget battle isn’t over deficits.

Virginia emerged from the COVID-19 pandemic emergency with a surplus under Gov. Glenn Youngkin, a Republican. He is now battling the Democratic-run General Assembly over the $2.6 billion in tax increases in its recently approved two-year budget.

The legislature rejected Mr. Youngkin’s plan for income tax cuts and a state sales tax increase to 5.2% from 4.3%. He also wanted to expand the sales tax to digital services, such as subscriptions to Netflix and Hulu.

Mr. Youngkin has been touring the state to decry the General Assembly proposal as a “backward budget.” He can amend or line-item veto the budget for lawmakers to consider when they reconvene on April 17 for a one-day session.

Wes Tharpe, senior adviser of state tax policy for the Center on Budget and Policy Priorities, said it is a time of reckoning in state capitals.

“There’s that real potential based on a state’s own policy choices over the past two or three years during the pandemic and the recovery to really start to show up on the other side as we emerge into this new phase,” he said.

For more information, visit The Washington Times COVID-19 resource page.