The trend toward budget shortfalls is unmistakable.
The trend toward budget shortfalls is unmistakable.
S tates across the country are preparing for a fiscal reckoning. For years, the federal government’s unprecedented pandemic spending spree masked structural problems in state budgets. With major Covid-era subsidies expiring soon, however — most notably the Affordable Care Act (ACA) premium tax credits set to expire next month — states are about to feel the weight of federal withdrawal.
To prepare, state governments must get serious about their own spending to make up for these federal shortfalls. The solution is simple: States across the country must adopt responsible spending frameworks that restrain year-over-year growth and convert genuine surpluses into long-term fiscal stability instead of new recurring obligations.
The trend toward budget shortfalls is unmistakable. In nearly every region, states have increased spending far faster than population growth and inflation. Even in traditionally conservative states, budgets have expanded rapidly as higher federal transfers during the pandemic made it easy for lawmakers to avoid tough decisions.
Take my conservative home state of South Carolina, for example. In the past decade, South Carolina’s general fund appropriations have nearly doubled, well above population growth and inflation combined.
On the other side of the political spectrum, Illinois has the same issue. According to Americans for Tax Reform, the state’s 2023 budget is $36.2 billion higher than it would have been had lawmakers simply limited spending growth to population and inflation a decade prior.
ATR also notes that, nationally, only four states — Alaska, Colorado, North Dakota, and Wyoming — kept spending below that benchmark over the past decade.
This is not a red-state or a blue-state issue. This is an every-state issue. Politicians from both parties tend to spend nearly all the revenue they have available each year, and, without codified limits in place, states will continue ratcheting up spending until fiscal disaster strikes.
That is why states should adopt a framework like the one proposed by the South Carolina Policy Council: responsible spending limits paired with surplus-triggered tax and strategic reserve allocations.
The model is very simple for states to apply to their budget. First, a state would establish a responsible spending limit. The limit is calculated by indexing the previous year’s general fund and multiplying it by population growth plus inflation, ensuring that spending does not grow faster than taxpayers’ ability to afford it.
Second, whatever tax revenue is above the responsible spending limit would be considered a surplus. The surplus would be automatically allocated towards tax relief in a mechanism called a “surplus trigger.” A percentage of the excess funds would go toward direct relief, while the remainder would be used to bolster reserve funds or offset liabilities. The reserve component ensures that states can maintain tax reform during future economic downturns rather than needing to hike taxes in bad years, as Kansas was forced to do in 2017.
This Responsible Budget model is simple, transparent, and responsible. Budgeting in this manner would ensure predictability for taxpayers and businesses, protection for the state in an economic downturn, and a clear path toward responsibly reducing tax burdens over time.
Spending limits also have broad bipartisan appeal among the voters. In South Carolina, 77 percent of Republicans and 56 percent of Democrats said that they would support a spending cap tied to population growth and inflation.
As pandemic-era assistance winds down, states must confront an uncomfortable truth: Washington is not coming to their rescue. The federal government’s fiscal straits are only going to get worse, and states will be forced to shoulder more responsibility for programs after federal tax credits and subsidies expire.
The Responsible Budget model provides a pathway for states to reclaim their fiscal sovereignty from Washington. It would give states a clear blueprint to living within their means, sustaining tax reforms, and avoiding the spending mistakes that led to today’s looming shortfalls.
The pandemic-era funding surge is ending, whether state governments like it or not. When the next economic downturn arrives, we will see which states planned their fiscal futures accordingly and which did not.