Governor Hochul’s plan to mail $500 checks to millions of households has a problem: the sales tax “surplus” she wants to dish out doesn’t exist.

Hochul on Monday said New York has a “one-time $3 billion surplus,” attributable to rising sales tax receipts, and that it “should be returned to 8.6 million households across New York later this year.” The governor proposed sending $500 “inflation refund checks” to married couples making up to $300,000 and $300 to individuals earning up to $150,000. Hochul yesterday reiterated that the state had an “inflation sales tax surplus.”

But anyone looking for an extra ten-digit entry in the state’s ledger will be disappointed. New York’s 4 percent tax on certain goods and services is poised to bring in $20.4 billion in the current fiscal year (FY25), a modest 2.4 percent increase from last year. Receipts are poised to grow more slowly than the 3 percent inflation anticipated over the same period, and officials earlier this year noted “a slow-down in the growth of the sales tax base.”

Finding a “surplus” in those receipts requires a tortured reading of the state’s financial plans, going back years.

The coronavirus pandemic (and the government response) pushed up prices, and the amount collected by state government rose amid that inflation. At its worst, between June 2020 and June 2021, the inflation rate hit 9 percent, and it remained above 3 percent until earlier this year. All told, the consumer price index (CPI-U) has risen 23 percent since March 2020, more than double what the Federal Reserve targeted for the same period.

Between fiscal 2020 and 2024, New York sales tax receipts (not including county and municipal receipts) rose 25 percent, from $15.9 billion to just shy of $20 billion. But that was only partially due to inflation: sales tax receipts are expected to grow faster than inflation based on the expectation that the economy will grow and produce more taxable transactions.

Source: NYS DOB

Sales tax receipts prior to the pandemic were on pace to be only slightly lower than where they are now. Unlike past episodes in which money has basically rained from the sky (as it did when the state secured over $6 billion in financial settlements a decade ago), the recent growth in sales tax receipts was anticipated.

As shown below, the fiscal doomsday feared in state capitals at the depths of the pandemic in April and May 2020 (orange line, below) didn’t materialize, owing partially to deficit-finance cash payments under Presidents Trump and Biden that boosted consumption (albeit by worsening the federal deficit).

Source: NYS DOB

The Budget Division was already revising receipt forecasts upwards even before inflation became a visible problem. Between spring 2023 and spring 2024, budget officials increased the fiscal 2025 sales tax receipt forecast (light green line) by less than $400 million after fiscal 2024 receipts (purple line) came in basically on the money.

To be sure, inflation is responsible for a portion of the recent increase in sales tax receipts, but nowhere near $3 billion and anything but a surprise. Put simply, New York is already spending its sales tax receipts.

Hochul’s rhetoric aside, her push to shell out $3 billion appears to have been sparked by state tax receipts unrelated to the sales tax coming in $2.9 billion higher than forecast in the spring.

This seems like a hair-splitting distinction but it’s a crucial one because New York since the 2021 tax hikes has been getting its biggest-ever share of its taxes from more volatile earnings and state officials risk basing expectations for future spending on revenues that might not exist a year (or a month) from now.

The state’s swift recovery from the pandemic seems to have attenuated memories of the Global Financial Crisis and the extent to which state government—and its governor—drowned in red ink when tax receipts from capital gains evaporated compared to 2007 levels.

While New York has built up “rainy day” and “economic uncertainty” reserves totaling about $21 billion since the pandemic, it is far from certain that the state could enter and exit a major economic downturn without having depleted them.

That’s in part because New York’s spending took on an unsustainable upward trajectory just before Hochul took office in 2021, as Governor Andrew Cuomo traded spending restraint for a bid at political self-preservation. Cuomo left office in August of that year, but the state’s heightened reliance on volatile tax receipts stuck around.

Cuomo’s last budget approved before the pandemic (fiscal 2020) spent $102 billion. New York this fiscal year is (officially) spending $132 billion, a 29 percent increase that far outstrips the 23 percent inflation observed between October 2019 and October 2024.

Most of the state budget now goes to just two programs: Medicaid, the now-sprawling healthcare program originally created to help the poor and disabled which now covers at least two in five New Yorkers, and school aid for local districts, which comes with less state accountability than ever. With state lawmakers largely unwilling to scrutinize them, both programs grow as Medicaid’s eligibility rules and school aid payments are revised upwards—based, in no small part, on statutory links to inflation.

Hochul is likely reluctant, and appropriately so, to let another $3 billion slide into the state’s spending baseline. That makes a one-time giveaway more politically appetizing than comparatively mundane fiscal maneuvers like reducing future borrowing or flattening the income tax. But it would still be dreadful public policy.