State revenue grew during pandemic, but spending grew faster

(The Center Square) — State governments saw more tax revenues and federal support flow into their coffers during the pandemic.

But that largesse may be ending — federal aid is winding down, spending has outpaced tax revenue, and in Pennsylvania, an aging population demands more government services.

Over the last five years, General Fund revenues grew by 30% while spending grew by 33%, according to a recent analysis by the Independent Fiscal Office. Corporate net income tax revenues grew dramatically (66%) and would have been more without rate reductions in recent years, as did inheritance tax revenues (56%), sales and use taxes (29%) and personal income taxes (26%).

At the same time, inflation grew by 22%; in real terms, Pennsylvania’s revenues went up by 8% while spending went up by 11%.

But in the future, those trends will change.

“FY 2023-24 largely marks the final year that temporary federal monies will directly support state spending (excludes state savings) and prior stimulus funds will support consumer spending,” the IFO noted. “Most analysts now expect economic and revenue growth rates to revert to historical averages.”

Consumers have “exhausted any savings built up during the pandemic,” the analysis noted, and political choices made on education, and the growing population that relies upon programs like Medicaid, will drive spending growth in the future.

The fundamentals don’t look good. Pennsylvania Treasurer Stacy Garrity has warned of a “silver tsunami” as the commonwealth’s average age gets higher, which could mean billions more in spending along with a reduction in tax revenues. The IFO has warned of such a scenario already.

Another problem has been the declining population. From 2021 to 2022, Pennsylvania lost almost 22,000 people to other states, mostly in the South. The commonwealth lost residents across all age groups and income levels.

The IFO expects revenue to grow by 1.1% in fiscal year 2024-25 while inflation will grow by 3%, effectively a revenue contraction. Most state spending growth has been driven by the Department of Human Services and the Department of Education.