New Fiscal Year Brings New Challenges and Opportunities in the States

July 1—the start of the new fiscal year in most states—typically marks a point when one can take a step back and reflect on the wins and disappointments of the past state legislative sessions. 2020 is markedly different. Nationwide business closures and stay-at-home orders in response to COVID-19 have led to unprecedented spikes in unemployment, decreased demand for consumer spending, and increased demand for vital public services. As a result, states face incredibly uncertain financial futures with little clarity regarding how their tax collections will fare over the next year.

States have still been required to sign budget bills amid all this uncertainty. Many states, including Georgia and Florida, waited until the last possible week to set their budgets. Other states such as Vermont, Pennsylvania, and New Jersey have passed temporary spending plans for the next few months. California legislators passed a budget shortly before the deadline, but they will likely make amendments as early as August. In fact, every state will have to reconvene at some point in the upcoming months to adjust their budgets.

Federal support from the CARES Act and rainy day funds have helped keep states somewhat afloat, but it hasn’t been nearly enough to stave off devastating cuts to public health, education, and other services. Not only is the dollar amount insufficient given the large budget shortfalls, but states also face restrictions on the use of federal funds. The federal aid is primarily intended to cover the direct costs of fighting COVID-19, not to replace revenues lost during the pandemic. Some states have held off spending CARES Act funds in the hopes that they will be granted more flexibility in the coming months.

In the meantime, numerous states’ unemployment insurance programs have been overwhelmed by increased demand. Eleven states and the U.S. Virgin Islands have already received advanced authorization for federal government loans to cover claims while other states, such as Washington, Louisiana, and Alabama, inch towards insolvency. These job and wage losses have disproportionately hurt Black and Hispanic individuals, who are overrepresented in some of the most affected industries.

To further complicate this state of financial uncertainty, COVID-19 cases are rising in 29 of 50 states. New waves of infection can undoubtedly trigger new shutdowns and reverse any recent strides in state tax collections. Responsibly managing health risks during reopening requires more public funding—not less—in the form of widespread testing and tracing.

Congress is expected to debate options for additional assistance for states, businesses, and unemployed workers in the coming weeks, but there is no guarantee that they’ll reach a deal. The House of Representatives included $875 billion in aid in its latest relief bill, the HEROES Act, but the bill has not received support from the Senate. Earlier this week, a coalition of over 170 state and local organizations, labor unions, trade associations, and businesses appealed to the Senate for additional state and local aid. The letter highlights the fact that without additional aid, state and local governments will have to delay or cancel infrastructure projects, further delaying economic and employment recovery. The hamstrung governments will also have to reduce purchases of goods and services, which would lead to declines in total gross domestic product (GDP). The Center on Budget and Policy Priorities estimates that state budget shortfalls will total $615 billion over the current state fiscal year and the subsequent state fiscal year. Even if states use their entire rainy day funds to cover the shortfalls combined with the initial aid from the CARES Act, they’ll remain $440 billion short.

Revenue-Raising Options

It has become increasingly clear that whether through federal intervention or other means, the current revenue crisis requires a revenue solution. My colleagues have outlined numerous policy options for raising revenue in recent months. These options include reforming the personal income and corporate income taxes to raise revenue from those most able to pay, modernizing the sales tax base, and removing statutory, procedural or constitutional hurdles that limit options for progressive taxation. States also should scale back their tax cuts and, at the very least, resist adopting new tax cuts as a policy response. As an example of what not to do, just this past Sunday, Louisiana approved two new corporate tax breaks, making it even more difficult to fund services that would keep low-earners afloat, such as rental assistance and extended unemployment benefits.

If states plan to reduce taxes in response to the coronavirus epidemic, the most effective use of the funds is to directly support workers who have been hit hardest by the pandemic. Colorado expanded eligibility for the state earned income tax credit (EITC) to taxpayers filing with an individual taxpayer identification number (ITIN), which will provide much-needed support for immigrant workers and their families. Illinois allocated at least $60 million in new funding towards immigrant services, which will include direct cash payments for those left out of federal economic impact payments. Similarly, California will extend its state EITC to ITIN filers who have at least one child under the age of six. California is also the first state to raise significant amounts of revenue by closing over $4 billion in corporate tax loopholes. Other potential bright spots are still on the horizon. New Jersey may expand its millionaires’ tax, and the District of Columbia is debating increasing taxes on households earning $350,000 or more. In New York, a group of 100 state legislators collectively released a statement calling for the state to raise taxes on the wealthy before cutting spending. Certainly, other states are likely to follow.

Amid this season of economic plight and uncertainty, there are also moments of opportunity for growth and systemic change. At the start of the new (fiscal) year, a great resolution for states is to seize every possible opportunity to use tax policy to stabilize revenues and enhance services and protections for the nation’s most underserved workers.

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