States banking big bucks as Fed attempts to fight inflation

JEFFERSON CITY, Mo. (AP) — State governments emerging from the coronavirus pandemic built historic cash surpluses as inflation in prices and wages drove up sales and income tax collections.

Now many states are reaping another reward: banking millions of dollars off those surpluses as the Federal Reserve fights inflation with higher interest rates.

“We’re catching both ends of it,” said Missouri Treasurer Scott Fitzpatrick, a Republican.

First, “we received a lot of extra money,” he said. “Now, nominally, we’re benefiting from the increase in interest rates from the Fed.”

Missouri is hardly alone. States ranging from Democratic-led Massachusetts to Republican-led Texas as well as politically divided Minnesota all are sitting on large surpluses that are swelling even further thanks to favorable interest rates on investments.

Citing a large surplus, Missouri Gov. Mike Parson called lawmakers into a special fall session to pass what he described as “the largest tax cut in the state’s history.” The first rung of the eventual $760 million income tax cut takes effect in January. Yet Missouri still expects to finish its 2023 fiscal year with a surplus, leaving money to potentially spend on things such as teacher pay raises.

In the first five months of its fiscal year, Missouri already has earned $116 million on its investments — nearly doubling the earnings of the entire previous year. But Fitzpatrick, the treasurer, advises caution for policymakers.

“Even though we’re making a lot of money, inflation is outpacing what we’re able to make on our money,” said Fitzpatrick, who will take office as the elected state auditor on Jan. 9. He added: “We need to be careful not to commit the state to a lot of ongoing new expenditures.”