U.S. States Seeing Red. Is more Stimulus on the Way?
At this time of year, the color red is associated with the upcoming holiday and the festivities, gift giving, and cheer that comes with it. For state and local governments, the color indicates major budget shortfalls.
Moody’s estimates states could see a budget shortfall of about $434 billion from 2020 through 2022 without additional stimulus from the federal government. In March, Congress passed the CARES Act which included $150 billion for state and local government. Last week a bipartisan group of senators proposed a $908 billion COVID-19 relief bill which included an additional $160 billion in aid for state and local governments. It remains to be seen what additional stimulus can be passed, when, and how any aid for state and local government will be allocated.
Many states have been dealing with budget shortfalls for years with others making incremental progress to improve their financial position over the last twelve years following the 2008 financial crisis. States that rely heavily on volatile tax structures such as energy taxes or progressive personal income taxes will be impacted more greatly. Florida, Louisiana, and Nevada are expected to be amongst the hardest hit by the pandemic.
U.S. states are bleeding cash as pandemic drags on with no stimulus in sight (yahoo.com)
Since states must balance their budget, for now they are forced to make difficult decisions. That may mean new or increased taxes, laying off staff (including education), or decreasing services. Even in states that have made progress to reduce budget shortfalls following the Great Recession it appears most are still failing the most vulnerable communities. A study by Economic Innovation Group shows that households in prosperous zip codes gained 8.7 million jobs since 2000 while households in distressed zip codes have lost jobs.
Let’s talk about the bill proposed last week. If approved, the $160 billion for state and local government combined with previously provided CARES Act money of $150 billion appears to be enough to offset losses for 2020 and 2021. Aggregate figures disguise steep losses in several states which raises the question of how funds should be distributed. Addressing each state’s revenue losses would be the expedient way to allocate funds, but that would be unfair to states that created rainy day funds, established less volatile tax codes, or budgeted more responsibly. Doing so would also discourage states from acting responsibly in the future. States are expected to prepare for recessions and replacing every dollar of lost revenue would be a mistake. At the same time, no state could have predicted a global pandemic.
What about allocating based on population, unemployment levels or some other measure? The issue with indifferent allocation is some states would receive more than needed while other’s needs would go unmet.
The federal government has also assisted states in addressing their budget shortfalls with indirect programs like The Pandemic Unemployment Assistance Program and Paycheck Protection Program. Both of those programs helped to stabilize state income tax collection.
The attached link from Tax Foundation provides a table which explores how $160 billion in state and local stimulus might be distributed. Obviously, first the relief needs to be approved. The Tax Foundation compares allocation using the (1) HEROES Act formula which included considerations for population, COVID-19 cases, and unemployment levels. (2) unemployment levels alone, and (3) population alone. Here is a snippet from that table.
Link to compete article and table: $908B Bipartisan Coronavirus Stimulus Package: State & Local Funding (taxfoundation.org)
For further reading on the CARES Act:
