Covid Recession Hurting State And Local Budgets, And The Economy

As President Trump golfs in Florida after disrupting the Congressionally-authorized Covid relief package, state and local budgets continue suffering from the Covid pandemic.  And even if signed, this package contains little direct aid for them.  It will not be any easier for Joe Biden to get adequate funding from a divided Congress, with Republicans arguing that states and cities are mismanaged, not suffering from an extraordinary pandemic and recession.

We are halfway through fiscal year 2021 for states, which for almost all of them began on July 1.  The National Association of State Budget Officers (NASBO) tells us this is the first year since the Great Recession where state general fund spending is declining, “1.1 percent compared to fiscal 2020 and…5.5 percent compared to governors’ budgets proposed before the pandemic.”

States so far have avoided even deeper cuts by using their rainy-day funds, built up after the Great Recession.  But those funds are being spent, so they will be less and less available for additional cushioning.  Without budget aid, they will cut spending and jobs, making the economic recovery slower and more painful than it should be. 

In several states, revenues have done better than originally feared, in part because wealthier people have not suffered as much from the pandemic.  This is the so-called “K-shaped recovery”—people with higher incomes, higher education, and white-collar jobs didn’t suffer the lasting damages hitting lower-income workers.

Higher income people often own homes and stocks.  And both of those assets have risen in value.  In spite of dramatic stories about falling prices in New York City, house prices have risen substantially across the nation.  Driven by low interest rates and a lack of housing supply, in September the Case-Shiller national home price index saw an annual increase of 6.9%, with a 6.6% rise in the twenty largest metropolitan areas. And stock indexes have risen so high that some observers worry about an unsustainable bubble.   

For states with progressive taxes, this unequal income and wealth has helped their budgets or at least prevented the worst-case forecasts from coming true.  States that depend more on specific industries and often more regressive taxes—tourism in Florida, Nevada and Hawaii or oil and gas revenues in Texas, North Dakota, and Louisiana—are seeing bigger budget gaps.

Some politicians claim higher-than-predicted tax collections eliminate the need for federal aid.  In rejecting further federal budget aid, Senator Rick Scott (R-FL) says “We’re seeing data now that clearly shows state and local governments’ projected revenue shortfalls from the coronavirus didn’t happen.”  This is in spite of Scott’s state of Florida having an 18 percent revenue gap from last year, fourth-worst in the nation.

These Republicans don’t—or won’t—understand the real picture.  True, revenues didn’t fall as far as first feared.  When the virus first hit, budget forecasters saw the abrupt drop in jobs and the economy and feared the worst.  But we didn’t get the worst case, because the federal government disbursed trillions of dollars in small business relief, expanded unemployment insurance, one-time direct household payments, and other spending.   

But avoiding the absolute worst case isn’t the same as achieving fiscal health.  Scholars at the Urban Institute tell us that although states had “better than expected tax collections,” the “actual revenue losses experienced by the states are deep and widespread, if not universal.”  

So even if Trump signs the relief bill, it isn’t enough, especially for hard-hit states and cities, and especially lower income and non-white workers, households, and children.  And his refusal to sign the bill as of Saturday means “millions of Americans will lose their jobless benefits” because the extension passed earlier this year expires at the end of 2020.

 Thea Lee, President of the Economic Policy Institute, says “the package is a fraction of what is required to address the monumental economic damage caused by inadequate response to the COVID-19 pandemic.”  There’s no real state and local budget aid and the unemployment insurance provisions are too weak.

But the difficulties in getting even this inadequate relief package through the Republican-controlled Senate with an (admittedly erratic and divisive) Republican President doesn’t bode well for the Biden Administration.  Republican legislators continue arguing that state and local budget problems are the fault of poorly managed governments, mostly (and falsely) by Democrats in their telling.

If they keep that narrative when a Democratic president takes office in January, prospects for adequate budgetary relief are not very promising.  And state and local budgets and the economy—and all of us, but especially low-income families—will pay the price.