Covid-19’s hit-to-state and local revenues are smaller than many feared

A torrent of federal aid to businesses and households helped keep income and consumer spending up. Unemployment fell and economic activity picked up much faster than expected. In contrast to previous recessions, the stock and housing markets have performed well.

All of these factors boosted state and local revenues last year. But pandemic-related costs have skyrocketed in many places, resulting in budget holes that could force states to cut back on other services, lay off workers, or impose taxes, without more federal help. Policy analysts estimate that state and local revenue losses from the coronavirus pandemic will total about $ 300 billion through fiscal year 2022, but that’s not including rising costs.

National and local governments employ 18.6 million people who provide services from waste collection to teaching children. Democrats in Congress are pushing for $ 360 billion in aid to cities and states as part of President Biden’s $ 1.9 trillion coronavirus bill, while many Republicans argue that this would only encourage tax debauchery.

Immediately following the coronavirus outbreak in March last year, states lowered revenue projections by an average of about 8%, with some expecting shortages of up to 20%. These forecasts were largely based on experiences during the 2007-2009 recession, when revenues fell sharply for several years.

According to the National Association of State Budget Officers, state revenues eventually fell 1.6% in fiscal year 2020 and were 3.4% lower than expected before the pandemic. While states expect revenues to decline by 4.4% in fiscal 2021, which ends June 30 for most, 18 states see revenues above forecasts.

“The revenue problem has not been nearly as bad as we thought,” said Michael Strain, the director of economic policy studies at the conservative American Enterprise Institute. “That is good news.”

The bad news according to Mr. Strain and others: an increase in spending on things like health care, unemployment benefits and food aid. Also, revenue losses differ significantly between states and cities.

“If you’re a state that’s doing worse, the fact that states have held up reasonably well on average doesn’t really matter to you,” Mr. Strain said.

State and local budget deficits have been at the center of discussions in Washington since last spring about what to include in another economic aid package.

Congress has provided state and local governments with more than $ 300 billion in federal aid, including grants for education and higher federal matching funds for Medicaid, although the funds had limitations on how they could be spent. Now some Republican lawmakers are proposing more money for schools and pandemic-related spending, such as vaccine distribution, but not funding specifically for state and local governments.

The left-leaning Center on Budget and Policy Priorities estimates that the state and local income deficit will total about $ 300 billion through 2022, as does Louise Sheiner, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. Moody’s Analytics estimates the figure at about $ 330 billion, well below the $ 500 billion it estimated last spring.

State and local governments also have about $ 75 billion in rainy days funds to offset budget deficits. But analysts said it’s unclear how much costs have increased as a result of the pandemic, making it difficult to estimate how much they need.

Mr. Strain estimated that $ 100 billion in flexible funding would be more than enough to help states get through the next fiscal year, which they should be planning for now.

From last March, when a nationwide pandemic was declared, through December, total government revenues fell 1.8% from the same period a year earlier, according to data from Lucy Dadayan, senior research associate at the Urban Institute, a think tank in Washington. Twenty states saw increases, including six – Vermont, Idaho, South Dakota, Utah, Colorado, and Alabama – that saw revenues increase by more than 3%. California, whose revenues have remained stable, is projecting a budget surplus for this fiscal year.

In contrast, 26 states reported a decline in sales in the first 10 months of the pandemic, including nine where revenues fell by more than 5%. Five states – Alaska, Florida, Hawaii, North Dakota and Oregon – had a double-digit decline.

“All states have been affected by the downturn, but they have been affected in different ways, by different sizes,” said Brian Sigritz, NASBO’s director of government tax studies.

The differences depend in part on the income structure of states and the unique features of the current recession.

States more dependent on services and tourism revenues, such as Florida and Hawaii, have been hit hard as the pandemic restricts travel and imposed restrictions on dining, entertainment and other personal matters. States heavily dependent on the energy industry, such as Alaska, Louisiana and Texas, have also seen a sharp decline in revenues as oil prices fell.

On the other hand, states that rely more on income taxes and have more progressive tax regimes, such as California, have fared better than expected. That’s because the pandemic has primarily affected low-income taxpayers, who account for a smaller portion of total income.

In Mesa, Ariz., Sales have been stable over the past 10 months. “That doesn’t tell the whole story,” said Mayor John Giles.

The city government is “ground zero” for pandemic relief, coordinating with hospitals, food banks, schools and other providers to provide essential services to a population of 500,000, said Mr. Giles. Mesa received $ 90 million from last year’s Cares Act for pandemic-related expenses.

“We could have doubled the bills for Covid-related aid involving the city,” said Mr Giles.

From his city hall office, the Republican mayor said that every week he sees thousands of cars lining up outside the Mesa convention center to pick up groceries for free. That program will expire at the end of February without additional assistance.

“People need to recognize the obvious, and that is the critical role that local government plays in the economy,” said Mr. Giles, pushing in Congress to support state and local aid in the following. aid package.

While overall earnings have been resilient, the number of government employee layoffs has risen sharply, especially among education workers. While some of this could be explained by the pandemic, there is some evidence that states with greater revenue losses have seen greater reductions in local education employment, said Ms. Sheiner of the Brookings Institution.

Employment in the state and the local population is also slowly recovering compared to other sectors, and is still 1.3 million jobs below pre-pandemic levels.

“That’s clear evidence that there is a problem that has not been addressed,” said David Kamin, President Biden’s deputy director of the National Economic Council. “With a more vigorous response that previously would have brought more relief to states and places, we may not have seen the kind of layoffs we saw last year.”

—Hannah Lang contributed to this article.

Write to Kate Davidson at [email protected]