Center on Budget & Policy Priorities: 'Pandemic's Impact on State Revenues Less Than Earlier Expected But Still Severe'
The pandemic's impact on state revenues this spring was smaller than the historical record predicted. Nevertheless, states, localities, tribal nations, and
State and local revenues have fallen as the pandemic has forced businesses to close or scale back, costing millions of jobs. Sales taxes, a major revenue source for states and, to a lesser extent, localities, have fallen especially sharply. Income taxes -- states' other primary revenue source -- are also down, as are revenues from gasoline taxes and other lesser sources.
As a result, states and localities have furloughed or laid off 1.2 million workers to date, far more than the 750,000 that lost their jobs during the Great Recession.[1]
They've also imposed spending cuts that diminish the reach and quality of public services.
Because many states are operating under budgets they know are unrealistic, more cuts -- likely leading to more layoffs, tuition hikes, and reductions in public services -- are coming unless the federal government steps up.[4]
State, Local Shortfalls Likely to Exceed
Fortunately for states, revenues for fiscal year 2020 (which ended in June in most states) came in significantly better than they expected. Our analysis of Census data and state tax collections finds that revenues were about 2 percent below states' pre-pandemic projections, which translates into total shortfalls of about
Much of that federal aid, though, is now expired or spent, and states still face considerably lower revenues, with unemployment high and business activity still down. In the last couple of months, states have grown modestly more optimistic about the current fiscal year but remain pessimistic about next year. States' adjusted estimates suggest that, in the absence of further federal support, shortfalls will total about 11 percent of their budgets in fiscal year 2021 and 10 percent in 2022, which begins next July in most states.[5]
Plus, states face increased costs due to higher enrollment in Medicaid and other programs. Including these higher costs, states' own estimates suggest shortfalls through fiscal year 2022 that total about
Those estimates could easily prove too optimistic. While the economic harm from this recession so far has been more concentrated among lower-income families than in past recessions, that may not remain as true in coming months. For example, if political turmoil and continued gridlock lead to a further decline in the stock market and more layoffs, including among more highly paid employees, the recession's impact on state shortfalls may come to look more like it did in past recessions, with the shortfalls increasing significantly. The historical relationship between unemployment rates and state revenues suggests that shortfalls could total
In addition, CBO's most recent forecast doesn't assume a major new surge in COVID cases. Such a surge, however, may now be beginning. If COVID cases continue to rise rapidly, the economy could deteriorate and slip into a "double-dip" recession -- a scenario that
If that occurs, state shortfalls would grow still more. The failure of
Local governments also face substantial shortfalls, though less than the states -- largely because localities rely more on property taxes, which so far have been stable. No comprehensive data are available to project local shortfalls with precision, but researchers generally estimate that aggregate local revenue losses are roughly half of states' losses.[7]
Using this rule of thumb, local revenue losses through fiscal year 2022 will reach about
Tribal nations and
In total, we estimate that shortfalls faced by states, localities, tribal nations, and
Similarly,
Federal Aid Has Been Critical But Falls Far Short
Federal aid to states provided earlier this year will help in the months ahead, but it's far short of what's needed. The Families First Coronavirus Response Act raised the federal share of Medicaid costs for the duration of the official public health emergency, which CBO now projects will extend into the 2022 calendar year; this will reduce state shortfalls by roughly
Putting these figures together, states and other governments face total shortfalls -- net of aid provided to date -- of
Again, if COVID cases surge dramatically and the economy double-dips, state and local shortfalls could rise even further.
These estimates do not include states' added costs to continue fighting the virus over the coming year even if COVID's spread is relatively controlled. The primary form of aid that states and localities have received so far for this purpose, the
Nor do these estimates include shortfalls states may face in 2023 or beyond. Federal policymakers would do well to design fiscal aid with triggers to extend the aid, or turn it off, depending on the state of the economy. With the economic outlook so uncertain, this would enable states and localities to avoid further substantial layoffs and other spending cuts if the economy remains weak for several years.
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REPORT and ENDNOTES: https://www.cbpp.org/research/state-budget-and-tax/pandemics-impact-on-state-revenues-less-than-earlier-expected-but
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