How Many States Have a Budget Surplus Today? Refunds and Federal Tax

Most states entered fiscal year 2026 with positive total balances, but the count of states running a true budget surplus is shrinking, and there is no single official tally because states define and report their balances differently. Aggregate state reserves are projected to fall to roughly 21.9 percent of general fund spending in fiscal 2026, down from 25.2 percent in fiscal 2025.¹ About 10 states now face a challenging fiscal outlook, and 40 states saw total tax revenue fall below their 15-year trends by the end of calendar year 2024.²

The Current Surplus Picture

The large majority of states entered fiscal 2026 with positive total balances when general fund ending balances and rainy day fund reserves are combined. A handful of states continue to report strong surpluses in the billions, particularly those anchored by major energy, technology, or tourism industries. General fund ending balances peaked at $211 billion in fiscal 2024 and have been falling in both fiscal 2025 and fiscal 2026.¹

The direction of travel matters more than the headline count. Annual general fund expenditures now exceed annual revenues in many fiscal 2026 budget recommendations, meaning states are drawing down accumulated reserves rather than building new ones. Even so, states are heading into fiscal 2026 with reserve levels roughly twice the long-term average since 1979. Most states still have a meaningful cushion. It is just getting thinner.

Why the Surpluses Are Shrinking

The surplus boom of 2022 through 2024 had a specific cause: pandemic-era federal aid combined with a surprise surge in tax revenue as inflation pushed up wages, prices, and capital gains. That combination was never going to last. Revenue growth has returned to more normal levels, and in many states it has slipped below long-term trends entirely.

Personal income tax collections tell the starkest story. Across the 44 states that levy an income tax, collections were 11 percent below their 15-year trend by the end of 2024, a shortfall of roughly $15.9 billion after adjusting for inflation. Thirty-seven of 41 states with broad-based income taxes underperformed their long-term trend lines.² Sales tax revenue was modestly below trend, down about 1.9 percent. Corporate income tax ran 8 percent above its long-term trend in the states that impose it, the one bright spot.

Spending has not slowed at the same pace. General fund expenditures grew 5.1 percent in fiscal 2025 before flattening to a recommended 0.8 percent growth rate for fiscal 2026. In many states, ongoing expenses still outpace incoming revenue, and the gap gets covered by drawing down prior-year surplus balances.¹

Federal pandemic-era transfers have also largely dried up. The American Rescue Plan Act funds that padded state treasuries between 2021 and 2024 had spending deadlines, and most of that money has been obligated or spent. States that used those transfers for ongoing programs are now absorbing those costs with state revenue alone.

What States Do With a Surplus

When a state finishes a year with more money than it budgeted for, the choices fall into a few categories. The smartest uses from a fiscal health standpoint tend to be one-time expenditures that do not create future obligations.

Infrastructure projects such as road construction, bridge repairs, broadband expansion, and building upgrades, which are capital costs that do not recur annually.
Extra payments toward unfunded pension liabilities, which more than a dozen states used post-pandemic surpluses to make. Paying down pension debt early saves money on interest over time.
Deposits into a rainy day fund, either voluntarily or as required by law, to build reserves against the next downturn.
Tax relief through permanent tax cuts, expanded credits, or one-time rebates. One-time rebates are the safer fiscal choice because they do not lock in reduced revenue for future years.
Retiring bonds or other outstanding debt early to reduce interest costs and free up future budget capacity.

The risk shows up when surplus revenue funds new recurring programs. A surplus is by definition temporary. States that treated the 2022 through 2024 windfall as a new baseline are the ones now facing the tightest budgets.³

States That Automatically Refund Surplus Revenue

At least nine states have laws that automatically return money to taxpayers when revenue collections exceed a specified threshold.⁴ The trigger mechanisms differ. Some require refunds when reserves top a fixed percentage of appropriations. Others kick in when actual collections exceed the original revenue forecast by a set margin, such as 2 percent. Colorado’s Taxpayer’s Bill of Rights ties an annual spending cap to population growth and inflation and requires the excess to go back to residents.

These laws were designed to limit government growth, and they work as intended during boom years. Pew’s research notes that automatic refund laws can restrict lawmakers’ options and prevent states from using temporary revenue spikes to pay for recurring programs or build reserves.⁴ A state that returned a large surplus to taxpayers one year may find itself cutting services the next. For the taxpayer receiving a check, the immediate effect is straightforward: you get money back.

Do You Owe Federal Tax on a State Surplus Rebate?

If your state sends you a rebate check from a budget surplus, whether it counts as taxable income on your federal return depends on how you filed. The IRS addressed this in Notice 2023-56.⁵

If you took the standard deduction on your federal return, a state tax rebate or refund generally is not taxable. You did not get a federal tax benefit from the state taxes you paid, so getting some of that money back does not create income. If you itemized deductions and deducted state income taxes, the rebate may be partially taxable under the tax benefit rule. You only owe federal tax on the portion that actually reduced your federal tax liability in the prior year. Because the $10,000 cap on state and local tax deductions limits what most itemizers can deduct, many people who itemize still will not owe anything on a state rebate.⁵

Payments made under general welfare programs, where eligibility depends on financial need, are excluded from federal gross income entirely. Your state should issue a Form 1099-G if the payment is reportable, which makes filing straightforward. If you receive a surplus-related payment and no 1099-G arrives, check with your state’s revenue department before assuming it is tax-free.

What Shrinking Surpluses Mean for You

The shift from surplus accumulation to surplus drawdown affects residents in concrete ways. States with healthy reserves can absorb revenue shocks without immediately raising taxes or cutting services. States that spent aggressively during the boom years now face pressure to close budget gaps, which could mean reduced funding for education, transportation, or public safety. The fiscal pressures heading into 2026 are the most significant since at least 2020.⁶

If you live in a state that recently cut taxes using surplus revenue, watch whether those cuts hold up as revenue normalizes. Permanent tax cuts funded by temporary surpluses can create structural deficits that take years to resolve. If your state sent you a rebate, check whether a Form 1099-G arrives before filing your federal return. If your state’s fiscal outlook is tightening, expect legislative debates over whether to tap rainy day funds, slow spending growth, or seek new revenue.

1
National Association of State Budget Officers. Fiscal Survey of States
2
The Pew Charitable Trusts. Most States Tax Revenue Falls Below Long-Term Trends Amid Federal Uncertainties
3
The Pew Charitable Trusts. State Budgets Are Downsizing
4
The Pew Charitable Trusts. Automatic Refund Policies Return Money to Taxpayers Even as State Budgets Tighten
5
Internal Revenue Service. IRS Issues Guidance on State Tax Payments
6
The Pew Charitable Trusts. State Reserves Recede