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States with diverse tax revenue streams see their budgets bounce back

STEVE INSKEEP, HOST:

Just one year ago, many cities and states across this country had desperate budget problems. This year, a lot has changed. Here's Nicole Nixon from CapRadio in Sacramento.

NICOLE NIXON, BYLINE: Everything was uncertain in 2020. And it was no different for state and city budgets.

(SOUNDBITE OF MONTAGE)

UNIDENTIFIED REPORTER #1: State budgets continuing to hemorrhage.

UNIDENTIFIED REPORTER #2: Alaska's state tax revenue plummeted 42.5%.

UNIDENTIFIED REPORTER #3: All of that red ink is going to lead to budget cuts.

NIXON: Most states did reduce their spending last year, cutting programs and laying off workers. But many have rebounded and then some, like California. The state went from a massive $54 billion deficit in 2020 to an even more astounding $80 billion surplus this year. And that doesn't even include billions more in pandemic aid from the federal government. In a state led by Democrats, this flood of new money has mostly gone towards strengthening the social safety net - rent relief, stimulus checks, health care for older, undocumented immigrants and free school lunches for every public school student across the state.

MICHELLE DRAKE: Well, I think it's excellent.

NIXON: Michelle Drake is the director of food and nutrition at Elk Grove Unified School District, which is one of the largest and most diverse in California. We met in an elementary school in suburban Sacramento. For lunch, students pick between cheese pizza or a turkey sandwich.

UNIDENTIFIED STUDENT: Thank you.

NIXON: They also got milk, apple slices and sugar snap peas. Starting next year, it'll all be free, paid for by the state - breakfast, too.

DRAKE: Healthy body, healthy mind - so physical activity, healthy eating, is going to allow children to learn better. There's study after study that proves that.

NIXON: Besides helping kids learn, Drake says free school meals lessen the financial strain on families and remove the stigma for kids who already get free and reduced-price lunch. Democratic lawmakers in California have long talked about a universal school meal program. The surplus helped make it a reality. Here's Governor Gavin Newsom earlier this summer, before he signed the bill which pays for the school lunches, along with expanded pre-K and more after school programs.

(SOUNDBITE OF ARCHIVED RECORDING)

GAVIN NEWSOM: This is a transformational budget. Mark my words, this is unlike anything we have ever done in this state.

NIXON: So why did the pendulum swing so dramatically for some states, from deep cuts just last year to massive surpluses? Lucy Dadayan is a tax policy expert with the Urban Institute.

LUCY DADAYAN: We see that states are doing much better than expected for a host of reasons.

NIXON: She says states that have diverse tax revenue streams, like California, have seen their budgets bounce back. The state relies heavily on high income taxpayers, who've weathered the pandemic well. It also got a boost from capital gains taxes, thanks to a strong stock market, and initial public offerings from companies like Airbnb and DoorDash. But not all states are doing so well.

DADAYAN: States that have high reliance on tourism and leisure and hospitality industries have been impacted the most, such as Hawaii or Nevada.

NIXON: States that don't have an income tax, like Florida and Texas, and states that rely heavily on oil - Alaska and Wyoming - took big budget hits. Federal pandemic aid from the American Rescue Plan helped these states avoid spending cuts. But Dadayan says eventually that money will run out, leaving the long-term fiscal picture for states as uncertain as ever.

For NPR News, I'm Nicole Nixon in Sacramento.

(SOUNDBITE OF TYCHO'S "EASY") Transcript provided by NPR, Copyright NPR.