The impact of Covid-19 on state and local revenues is lower than feared

A flood of federal aid to businesses and households helped support income and consumer spending. Unemployment fell and economic activity picked up much faster than expected. Unlike previous recessions, the equity and housing markets performed well.

All of these factors supported state and local government revenues last year. But costs related to the pandemic have skyrocketed in many localities, leading to budget holes that may force states to cut other services, lay off workers or raise taxes, in the absence of help. increased federal. Political analysts estimate that state and local government revenue losses due to the coronavirus pandemic will amount to around $ 300 billion in fiscal 2022, although that does not include the spending hike.

State and local governments employ 18.6 million people, who provide services ranging from garbage collection to educating children. Democrats in Congress are pushing for $ 360 billion in aid to cities and states under President Biden’s $ 1.9 trillion coronavirus relief bill, while many Republicans say that this would only encourage tax debauchery.

Immediately after the coronavirus outbreak last March, states cut revenue forecasts by about 8% on average, with some expecting deficits of up to 20%. These projections were largely based on the experiences of the 2007-2009 recession, when sharp declines in income lasted for several years.

Ultimately, state revenue fell 1.6% in fiscal 2020 and was 3.4% lower than forecast before the pandemic, according to the National Association of State Budget Agents. . While states expect revenue to decline 4.4% in FY2021, which mostly ends June 30, 18 states are seeing higher-than-expected revenue.

“The income problem has not been as bad as we thought,” said Michael Strain, director of economic policy studies at the conservative American Enterprise Institute. “It’s good news.”

The bad news, according to Strain and others: increased spending on things like health care, unemployment benefits and food aid. In addition, income losses vary widely among states and cities.

“If you’re a state doing worse, it doesn’t really matter to you that on average states seem to have held up well enough,” Strain said.

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

Congress has provided state and local governments with more than $ 300 billion in federal aid, including education grants and higher federal matching funds for Medicaid, though the funds come with restrictions on how they could be spent. Now, some Republican lawmakers are proposing more money for schools and pandemic-related expenses, such as vaccine distribution, but no funding specifically for state and local governments.

The Left Center on Budgetary and Policy Priorities estimates that the state and local government revenue deficit will total around $ 300 billion until 2022, as does Louise Sheiner, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. Moody’s Analytics puts the figure at around $ 330 billion, well below the $ 500 billion estimated last spring.

State and local governments also have around $ 75 billion in rainy day funds to offset budget deficits. But analysts said it was not clear how much spending increased due to the pandemic, making it difficult to estimate what they might need.

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

From last March, when a nationwide pandemic emergency was declared, through December, overall state revenue declined 1.8% from the same period a year earlier, according to the data from Lucy Dadayan, senior research associate at the Urban Institute, a Washington think tank. Twenty states saw increases, including six – Vermont, Idaho, South Dakota, Utah, Colorado and Alabama – which saw their incomes rise by more than 3%. California, whose revenues have remained stable, forecasts a budget surplus for this fiscal year.

In contrast, 26 states reported declines in income in the first 10 months of the pandemic, including nine where incomes fell more than 5%. Five states – Alaska, Florida, Hawaii, North Dakota, and Oregon – saw double-digit declines.

“All states have been affected by the recession, but they have been affected in different ways, in different magnitudes,” said Brian Sigritz, director of budget studies at NASBO.

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

States that rely more on revenue from services and tourism, like Florida and Hawaii, have been hit hard as the pandemic has limited travel and resulted in restrictions on dining, entertainment and other in-person activities. States that rely heavily on the energy industry, such as Alaska, Louisiana, and Texas, have also seen their income drop sharply due to falling oil prices.

On the flip side, states that rely more on income tax and have more progressive tax systems, like California, have done better than expected. This is because the pandemic has primarily affected low-income taxpayers, who provide a smaller share of overall income.

In Mesa, Arizona, earnings have been stable for the past 10 months. “It really doesn’t tell the whole story,” said Mayor John Giles.

The city government is “the zero point” 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 the Cares Act last year for expenses related to the pandemic.

“We could have submitted duplicate invoices for the Covid-related assistance the city was involved in,” Mr. Giles said.

From his office window at city hall, the Republican mayor said he saw thousands of cars lining up outside the Mesa convention center every week to pick up free races. This program will expire at the end of February without further assistance.

“People need to recognize the obvious, which is the vital role that local government plays in the economy,” said Mr. Giles, who urges Arizona Republicans in Congress to support state and local aid in the next rescue program.

Although overall incomes have been resilient, layoffs of civil servants have risen sharply, especially among education workers. While part of this could be explained by the pandemic, there is evidence that states with larger income losses have experienced larger reductions in local education employment, said Ms. Sheiner of the Brookings. Institution.

National and local employment has also been slow to pick up, relative to other sectors, and remains 1.3 million jobs below pre-pandemic levels.

“This is clear evidence that there is a problem that has not been resolved,” said David Kamin, deputy director of President Biden’s National Economic Council. “With a more robust response that would have given states and localities more relief earlier, 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]