The bill the Senate passed Wednesday would give state and local governments $150 billion to help plug budget holes. It also includes $31 billion for local schools and colleges. That money is definitely welcome.
But it will be nowhere near sufficient to prevent cascading state and local government layoffs and cuts to critical public services that otherwise lie ahead. For context: States suffered a cumulative $600 billion revenue shortfall in the first five years after the Great Recession hit.
And there are ample reasons to believe the fiscal crunch could be worse this time around. Many states entered this dual public health and economic emergency in poor budgetary shape, with too little in their “rainy day” funds to handle this Noah-style deluge. As of late last year, only about half the states had the funds they need to weather even a moderate recession, according to Moody’s Analytics.
Seemingly every state will take a huge hit, for different reasons. Those whose economies are especially dependent on tourism (Florida, Nevada), energy (Texas, Oklahoma) and other hard-hit sectors are in trouble. As are those dependent on capital gains revenue (New York, California), given stock market declines. High-fixed-cost public transit systems everywhere will suffer as they lose rider revenue. And so on.
Among the biggest problems are the expected declines in sales tax collections, which make up about a third of state revenue. With millions of retail stores, restaurants and other businesses shuttered, sales on which those taxes are based have stopped. Even the early-pandemic panic-buying is unlikely to help, because groceries, medications and other necessities are often exempt from sales taxes.
Taking a cue from the feds, many states have delayed their deadlines for filing 2019 income taxes, too, meaning they will not be able to count on an April bump.
Tax money that would normally be withheld from people’s paychecks this year will also be depressed while people are out of work, suggesting revenue shortfalls will continue for a while.
Depending on how long layoffs last, they could eventually start to depress property values, too — and thus the property taxes that disproportionately pay for schools and local services. Which suggests there could be reverberating fiscal effects for years after this pandemic ends.
That’s just one side of the ledger. Meanwhile, states’ expenses are spiking, too.
This always happens during recessions, as people seek a safety net when their income falls. But the particular cause of this recession — a public health emergency — means there will be even more demand for public services than usual.
The aid package passed the Senate Wednesday would top off what states will offer workers seeking unemployment benefits, and extend benefits to new categories of workers, but states will still be on the hook for huge obligations.
Medicaid enrollment also usually rises during a downturn, as jobless people lose their private insurance and reduced earnings make people newly eligible for benefits. But given that this downturn was caused by a pandemic, we should expect that more people than usual will seek public insurance, and that the spending per enrollee will be higher than normal.
In its “phase two” bill, Congress temporarily increased the share of Medicaid costs borne by the federal government — but not by nearly as much as is needed, and not even by as much as it did in response to the Great Recession. Which is a shame, given that Medicaid is such a useful vehicle for distributing federal funds to states even when there isn’t a public health emergency.
“The fastest, most efficient way to get money out to the states is through Medicaid, because there’s a whole mechanism already that allows for that all in place,” said Scott Pattison, former executive director of both the National Governors Association and the National Association of State Budget Officers.
Unlike the federal government, most state and local governments are legally required to balance their budgets. Without more federal help, states and cities shouldn’t expect a swift snapback from this crisis. Instead, they should brace for a downward spiral — of service cuts, deteriorating conditions for households and businesses, and depressed economic conditions for years to come.