Just Taxes Blog by ITEP

Economic Catastrophe in States Looms as Federal Relief Lags

April 29, 2020

If you appreciate schools in your community, reliable trash pick-up, and clean water at the turn of a faucet, then you know the value of adequately funded state and local government.

These basics are now in grave danger because revenues are declining and the federal government has not provided fiscal relief at the level needed in the midst of a colossal economic and health crisis. Towns, cities, counties and states face unprecedented shortfalls due to of collapsing proceeds from sales taxes, income taxes, and tourism, gambling and oil and gas industry revenue.

States are still scrambling to measure the budget hole they face, and it will likely take a few months before they know its size. Researchers at the Center on Budget and Policy Priorities (CBPP) estimate shortfalls will reach at least 10 percent of current year general fund revenues and grow to 25 percent in the fiscal year starting in July. While states can and should act to shore up revenue, the magnitude of the crisis and constraints on borrowing make federal aid essential in an economic crisis like this one.

Senate Majority Leader Mitch McConnell (R-KY) is trying to politicize things, calling additional aid to states a “blue state bailout,” as if we’re not all one country facing a historically staggering moment. But his threats to deny aid could turn this recession into a depression for states across the political and geographic spectrum. Because if states and localities can’t pay teachers, first responders and health care providers, economic conditions will spiral downward quickly. The human costs also will be steep.

Economies rely on spending, and a dollar spent in the public sector goes particularly far. This is why state spending cuts are worse for the economy during a downturn than tax increases targeted toward those most able to pay, as economists Peter Orszag and Joseph Stiglitz have demonstrated. More than 10 percent of U.S. employees work for state or local government, and sectors like construction, transportation, health, non-profits, and education are highly reliant on public spending even when the employer is from the private sector. If states aren’t spending on, say, road repair, private sector construction employees will be out of work for much longer. And that’s not even considering what happens to the factory that relies on that well-paved road to get its goods to market.

McConnell has blithely suggested that states should declare bankruptcy. Not only is this technically illegal, but the effect also would be to prolong and greatly deepen the decline, exacerbating rather than addressing the problem. And while McConnell strives to make the fight partisan, the truth is that all states are affected—whether led by Democrats or Republicans. Oil-dependent states like Alaska, Oklahoma, Louisiana and Texas are being pummeled. Tourism-heavy states like Florida, Hawaii and Nevada are reeling. States that rely heavily on sales taxes—Florida, Nevada, Tennessee, Texas, South Dakota and Washington state come to mind—are staggering under the weight of sharp declines in consumer purchases.

Many states have improved their rainy day funds since the last recession, although some have weakened their unemployment compensation funds over the same period. States can and should tap reserves at a time like this, but they won’t go far enough in any state, given the scale of the crisis.

That’s why a bipartisan group of governors and senators from Louisiana to Maryland to Ohio have called for at least $500 billion in state and local fiscal relief. They also need specific help with testing, protective equipment, unemployment costs, Medicaid costs, social services, education and infrastructure. States can’t be on their own as they address the double whammy of plunging revenue and skyrocketing needs.

Because of the pandemic, health care costs are spiking, just as enormous numbers of people have lost their employer-based health insurance. States bear a huge share of these costs. In the 14 states that have failed to accept federal dollars to expand Medicaid, the high share of uninsured people worsens the situation.

When it’s safe to go back to work, capital projects will be badly delayed, students will be months behind, and non-COVID-19 health needs will be intense. The damage to public and family finances will be deep. At that point, with the private sector badly scarred, public spending will be essential both to address delayed needs and to regenerate demand. Yet, governors in states like Ohio are already calling for 20 percent across-the-board cuts, which will cause long-term damage. During the Great Recession, more than 30 states raised significant revenue and paired it with federal fiscal relief to try to stave off such drastic measures. We need a combination of both of these again.

Policymakers cannot take on COVID-19 with timidity, stinginess and political vengeance. If they do, we’ll be in for a long, slow, uneven recovery. We must instead use this moment to remind ourselves that we are the economy, that public spending can better prepare us for future climate, health and infrastructure needs, and that by investing in our people and our communities, we can ensure a better future in all of our struggling states.



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