Covid-19’s revenue for state and local revenue is smaller than many feared

A flood of federal aid to businesses and households has helped boost income and consumer spending. Unemployment declined and economic activity increased much faster than expected. Unlike in previous recessions, the stock market and the housing market performed well.

All of these factors boosted state and local revenues last year. But the cost of pandemics has skyrocketed in many areas, leading to budget gaps that could force states to cut back on other services, lay off workers or raise taxes without more federal aid. Policymakers estimate that the loss of revenue and local revenue due to the coronavirus pandemic will amount to about $ 300 billion through fiscal year 2022, but that does not include rising spending.

State and local governments employ 18.6 million people, providing services from garbage 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 billion coronavirus relief bill, while many Republicans argue it will only encourage fiscal crime.

Immediately after the outbreak of the coronavirus in March last year, revenue projections declined by an average of about 8%, with some expecting deficits to be as high as 20%. These forecasts were largely based on experiences during the 2007-09 recession, when the sharp decline in revenue lasted several years.

Eventually, government revenue fell 1.6% in the 2020 financial year and was 3.4% lower than predicted before the pandemic, according to the National Association of State Budget Officers. While states expect fiscal revenue to fall by 4.4% in 2021, ending most on June 30, 18 states see the above forecast.

“The revenue problem was not yet as severe as we thought,” said Michael Strain, director of economic policy studies at the conservative American Enterprise Institute. “This 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. Revenue losses also vary significantly between states and cities.

“If you’re a worse performing state, the fact that states seem to have held up pretty well on average does not really matter to you,” he said. Strain said.

The lack of state and local budgets has 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 grants for education and higher federal matching funds for Medicaid, though the funds contain restrictions on how they can be spent. Some Republican lawmakers are now proposing more money for schools and spending on pandemics, such as the distribution of vaccines, but no funding specifically for state and local governments.

The left-wing Center for Budget and Policy Priorities estimates that the state deficit and local revenue deficit will reach $ 300 billion by 2022, as does Louise Sheiner, director of the Hutchins Center for Fiscal and Monetary Policy at the Brookings Institution. Moody’s Analytics puts the figure at about $ 330 billion, well below the $ 500 billion it estimated last year.

State and local governments also have about $ 75 billion in rainfall funds to cover budget deficits. But analysts said it was unclear how much spending had risen due to the pandemic, making it difficult to estimate how much they would need.

Mr. Strain estimated that $ 100 billion in flexible funding would be more than enough to help states through the next financial year, which they now have to plan.

According to data from Lucy Dadayan, senior research fellow at the Urban Institute, a Washington think tank, total revenue has declined to 1.8% since March last year, when a nationwide state of emergency was declared a pandemic. years before. Twenty states rose, including six – Vermont, Idaho, South Dakota, Utah, Colorado and Alabama – which saw revenues rise by more than 3%. California, whose revenue was steady, is projecting a budget surplus for this fiscal year.

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

“All countries have been affected by the downturn, but they have been affected in different ways, by different sizes,” said Brian Sigritz, director of fiscal studies at NASBO.

The differences depend in part on the state’s revenue structure and on the unique characteristics of the current recession.

States that rely more on revenue from services and tourism, such as Florida and Hawaii, have been hit hard by the pandemic’s travel restrictions and restrictions on restaurants, entertainment and other personal matters. States that rely heavily on the energy industry, such as Alaska, Louisiana and Texas, also saw sharp declines as oil prices fell.

On the other hand, states that rely more on income taxes and more progressive tax systems, such as California, outperformed expectations. This is because the pandemic mainly affected low-income taxpayers, who make up a smaller share of total income.

In Mesa, Arizona, income has been steady for the past ten months. “However, it really does not tell the whole story,” said Mayor John Giles.

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

“We could have submitted twice as much in invoices for Covid-related assistance involving the city,” he said. Giles said.

Out of his office window in City Hall, the Republican mayor said he sees thousands of cars parked outside the Mesa Conference Center each week to pick up free groceries. The program will expire at the end of February without additional assistance.

“People need to give the obvious recognition, which is the critical role that local government plays in the economy,” he said. Giles said, urging Arizona Republicans in Congress to support state and local aid in the next aid package.

Although overall income was resilient, the layoffs of government workers rose sharply, especially among teachers. Although some of this can be explained by the pandemic, there is evidence that states with greater loss of revenue have had greater decline in local education, Ms. Sheiner of the Brookings Institution said.

Employment in the state and local government also recovered slowly, compared to other sectors, and is still 1.3 million jobs below the pre-pandemic level.

“This is one clear proof that there is an issue that has not been addressed,” said David Kamin, the deputy director of President Biden’s National Economic Council. “With a more forceful response that would have given more relief to states and localities in the past, we may not have seen the kind of dismissal we saw last year.”

—Hannah Lang contributed to this article.

Write to Kate Davidson by [email protected]