Covid-19’s impact on state and local revenues is less than many feared

A flood of federal aid to businesses and families has helped increase consumer income and spending. Unemployment fell and economic activity accelerated much faster than expected. Unlike previous recessions, the stock and housing markets performed well.

All of these factors boosted state and local revenues last year. But pandemic-related costs have skyrocketed in many locations, resulting in budgetary holes that could force states to cut back on other services, lay off workers or raise taxes, without further federal aid. Policy analysts estimate that state and local revenue losses due to the coronavirus pandemic will total about $ 300 billion by fiscal year 2022, although this does not include rising expenses.

State and local governments employ 18.6 million people, who provide services ranging 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 trillion coronavirus bill, while many Republicans argue that it would only encourage fiscal debauchery.

Immediately after the coronavirus outbreak last March, states reduced revenue projections by about 8%, with some predicting declines of up to 20%. These projections were largely based on experiences during the 2007-09 recession, when sharp declines in revenue lasted for several years.

In the end, state revenues fell 1.6% in fiscal 2020 and were 3.4% below projected before the pandemic, according to the National Association of State Budget Officials. While states expect revenues to fall 4.4% in fiscal year 2021, which ends June 30 for most, 18 states are seeing revenues above forecast.

“The revenue problem was not as bad 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 Strain and others: an increase in spending on items like health, unemployment benefits and food assistance. In addition, revenue losses vary significantly between states and cities.

“If you are in a state that is getting worse, the fact that, on average, states appear to have held up very well does not matter to you,” said Strain.

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

Congress has provided state and local governments with more than $ 300 billion in federal aid, including education grants and higher federal counterpart funds for Medicaid, although the funds have restrictions 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 no specific funding for state and local governments.

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

State and local governments also have about $ 75 billion in rainy day funds to make up for budget shortfalls. But analysts said it was unclear how much spending had increased due to the pandemic, making it difficult to estimate how much they might need.

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

Since last March, when a national pandemic emergency was declared, until December, general state revenues have fallen 1.8% compared to the same period last year, according to data from Lucy Dadayan, senior associate researcher at Urban Institute, a Washington think tank. Twenty states saw increases, including six – Vermont, Idaho, South Dakota, Utah, Colorado and Alabama – which saw revenues rise by more than 3%. California, whose revenues have remained stable, projects a budget surplus for this fiscal year.

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

“All states were affected by the crisis, but they were affected in different ways, by different magnitudes,” said Brian Sigritz, director of state tax studies at NASBO.

The differences depend in part on the states’ revenue structure 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 because the pandemic has limited travel and imposed restrictions on restaurants, entertainment and other personal businesses. States that rely heavily on the energy industry, such as Alaska, Louisiana and Texas, have also seen sharp declines in revenue with falling oil prices.

On the other hand, states that rely more on income tax and have more progressive tax systems, like California, performed better than expected. This is because the pandemic mainly affected low-income taxpayers, who represent a smaller share of general revenue.

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

The city government is the “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 Giles. Mesa received $ 90 million from last year’s Cares Act for expenses related to the pandemic.

“We could have shown twice that on Covid-related assistance bills that the city was involved in,” said Giles.

From the window of his City Hall office, the Republican mayor said he sees thousands of cars lining up every week outside the Mesa convention center to pick up free groceries. This program is due to end at the end of February without further assistance.

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

While overall revenues have been resilient, the layoffs of civil servants have increased dramatically, especially among education workers. While part of this can be explained by the pandemic, there is evidence that states with the largest revenue losses have seen further reductions in local educational employment, said Sheiner of the Brookings Institution.

State and local employment has also recovered slowly, compared to other sectors, and is still 1.3 million jobs below the pre-pandemic level.

“This is a clear point of 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 locales more relief earlier, we may not have seen the kind of layoffs that we saw last year.”

—Hannah Lang contributed to this article.

Write to Kate Davidson at [email protected]