During the pandemic, the federal government moved aggressively to shore up the economy as people were told to stay home and businesses closed temporarily, raising concerns about widespread economic hardship and a possible recession.

Congress spent trillions of dollars to prevent an economic crash. Direct financial relief was sent to individuals. People who lost their jobs received enhanced unemployment benefits. Businesses received funding to pay their employees, even though their doors were closed. And state governments received money to respond to the pandemic and other concerns.

It worked. In the first two years of the pandemic, increasing incomes and consumer spending in Maine fueled a 35% increase in annual state tax revenues, from nearly $4 billion to nearly $5.4 billion.

“Those increases were really unprecedented,” said Mike Allen, the state’s associate commissioner on tax policy. “The other crazy thing about the growth rate was we were cutting taxes during that period.”

But the days of eye-popping revenue growth are over. The federal stimulus spending has worked its way through the economy, and revenue growth has begun to slow or in some cases decline.

“I think what you’re seeing in (fiscal year) ’23 and ’24 is the economy coming back down to underlying economic factors without the sugar highs of the federal stimulus spending,” said Charles Colgan, a former state economist who is now a researcher in California.

That new reality is now hitting Maine lawmakers, who face a $450 million gap between the state’s expenses and anticipated revenues over the next two years.

The deficit is driven mostly by increased spending to pay for laws that were passed when revenues were flush. Those built-in cost increases, totaling more than $1.1 billion over the next two years, are now projected to outpace revenue growth, according to the governor’s budget office.

“This was a difficult budget to put together,” Gov. Janet Mills said in a written statement Friday when announcing her $11.6 billion budget proposal. “Our economy is strong, but our revenues are leveling-off, and while prior legislatures have made many important and worthwhile investments, we have to consider what we can sustain in this budget cycle.”

Mills’ budget proposal includes some revenue increases, including a $1 a pack increase in the state cigarette tax, as well as rolling back some of the previously approved spending. The proposal prompted complaints from both conservative and progressive groups, underscoring the challenges facing lawmakers as they seek a budget that can win enough support to pass.

NEW ARRIVALS SOFTEN THE BLOW

The two largest sources of general fund revenue in Maine — individual income taxes and sales and use taxes — account for about 85% of the state’s overall revenue, which peaked at $5.39 billion in fiscal 2022. Corporate income tax is the third-largest source of revenue, but it is far less significant and amounts to less than 10% of overall revenue.

Both of the top two categories saw significant increases during the first two years of the pandemic. As incomes grew, individual income tax revenue shot up by nearly 13% in fiscal 2021 and 25% in 2022. And as consumer spending increased, sales and use taxes grew 16% in 2021.

Since 2022, the state has experienced a $192 million drop in individual income tax revenue, though state officials say roughly $80 million of that is the result of the state delaying tax filings in coastal communities impacted by winter storms last January, pushing that revenue into the current fiscal year. Sales tax revenue has continued to grow, but at a slower rate.

Despite the projected budget shortfall, state officials say Maine’s economy remains strong and hasn’t seen the drastic decreases in revenue they once expected.

That’s in large part because of the number of people who have moved to the state during and after the pandemic.

Maine ranked in the top 10 states for in-migration since the start of the pandemic, officials said. The state’s most recent consensus economic forecast, released in November, noted Maine gained over 6,300 people in 2023, the ninth-highest total of net in-migration in the country. Maine also ranked ninth in 2022, but was ranked fifth in 2021, the report said.

State Economist Amanda Rector said the shift toward remote working, coupled with perceptions of Maine being a safe state with a lot of open space during the pandemic, compelled people to move and stay here.

“A lot of people were bringing with them good-paying jobs from out of state,” Rector said. “They were working here remotely so they had much higher incomes. That contributed to the really rapid income growth we saw. We also saw a lot of upward pressure on wages generally. And, of course, all of those folks moving here also brought a lot of demand for services and goods.”

RELIEF PROGRAMS PLAY ROLE

Allen, the associate commissioner on tax policy, said income tax collections spiked early in the pandemic largely because the federal government increased unemployment benefits by $600 a week as businesses were forced to shut down. In some cases, laid-off workers earned more than their previous salary, he said.

Once the economy reopened, businesses were competing for workers, leading to an increase in wages overall.

At the same time, Allen said, investors were still making money off the stock market, which remained strong, and other capital gains that help pad state coffers.

As state revenue spiked, Mills and lawmakers used much of the unanticipated state revenues — those exceeding the state’s generally conservative estimates — to send state taxpayers several rounds of relief checks. That move was a recognition that the increased revenues were temporary and shouldn’t be built into future budgets.

All of those factors meant people continued to have disposable income, but fewer ways to spend it. With businesses closed and people staying home to avoid the virus, consumers spent more of their money on goods, since online ordering became more common.

“A lot of those things were sort of moving in the same direction,” Allen said.

He said several policy changes and court decisions in the years leading up to the pandemic positioned Maine to weather the pandemic better than other states.

One court case, for example, allowed states to collect income taxes from businesses that sold products in the state but didn’t have a physical presence here.

And state lawmakers enacted a statute to collect sales taxes from so-called marketplace facilitators — companies that are intermediaries between retailers and consumers.

Because Maine’s tax structure focuses on goods rather than services, revenues remained strong even when people were staying home — buying new furniture or kitchen appliances instead of eating out and traveling. That allowed Maine to weather the blizzard of uncertainty during the pandemic, Allen said.

“It was a perfect storm. We had all of these provisions in place,” Allen said. “The pandemic was right in our wheelhouse. It was the complete opposite of every other recession in modern history.”

Once the economy reopened, however, consumers shifted more of their spending from goods to services, which is why Maine’s sales tax revenue is flattening, Allen said.

That pandemic-fueled revenue spike came even as state lawmakers enacted tax cuts, which are expected to reduce general fund revenue by $265 million in the current fiscal year.

According to the state budget office, property tax relief was provided by expanding property tax fairness credits, the Homestead Exemption and eligibility for the property tax deferral program. Additional tax relief for low- and middle-income households came in the form of expanded earned income tax credits, pension deductions, student loan tax credits and tax credits for dependents. And business tax credits, such as the new Dirigo Tax Credit.

OTHER STATES IN SAME BOAT

Maine is not alone in dealing with flattening or declining revenue as the national economy returns to normal. Colgan, the former state economist, said many states are now confronting revenue and budget challenges, especially those that enacted broad-based tax cuts during the pandemic.

“It’s the same forces at work,” he said. “I imagine this is true in every state to one degree or another.”

Maine’s economy has been among the more stable in the country through the pandemic.

According to Pew Charitable Trust’s Fiscal 50 project, incomes, sales and corporate tax receipts through the second quarter of 2024 were down 2.8% nationally below their 15-year trend lines.

Maine is 1.1% below its 15-year trend line, one of 24 states outperforming the national average. Twelve states are still above their long-term revenue trends.

In New England, only Rhode Island remains above its 15-year trend line. Maine and Vermont come in 1.1% under trends, while New Hampshire and Massachusetts were down 2.6% and 2.5%, respectively. Connecticut was down 7.6%.

Rector said Maine’s economy is strong and stable, but whether it remains that way will depend in part on policies enacted by the incoming Trump administration, which has promised mass deportations of immigrants and increased tariffs on goods from China, Canada and Mexico.

Rector said deportations could make it harder for businesses to find workers, which would create additional upward pressure on wages. That, plus any new tariffs, could raise consumer prices, reigniting concerns about inflation, which could lead to a freezing or even increases in interest rates again.

“We still have a sturdy economy, but we don’t know what’s going to happen on the immigration front,” she said. “It’s sort of a waiting game right now. If things continue the way they have been, we’re looking at an ongoing stable economy.”

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