Yes, for the fiscal year that ended June 30, 2020, total collections fell 3.4 percent short of what states had planned before the pandemic, according to the National Association of State Budget Officers (NASBO), but this was less than many had forecast, and early revenue reports for the second half of 2020 suggest the worst is probably over for most states. Aggregate state and local tax receipts rebounded sharply between the second and third quarters, and now stand at pre-pandemic levels, of about $1.9 trillion, according to the Federal Reserve. Wisconsin just reported that it expects revenue to meet or exceed forecasts through fiscal 2023.
“For various reasons, some of the more dire projections last spring . . . did not come to pass,” Kathryn White, director of budget process studies at NASBO, told me.
So how much unrestricted aid do the states really need? Given the huge sums at stake and the importance of the issue, you’d expect the answer to be readily available. But it’s not, for good reasons (a lack of accurate data on the fast-moving flow of state taxes and spending) and not-so-good reasons (the partisan and ideological biases of those debating the issue).
The right number probably isn’t zero — though that’s what states have gotten so far, largely because of resistance from Republicans in Congress, who have bashed a “blue state bailout” that would purportedly see fiscally responsible Republican-run states rescue alleged Democratic-run profligates.
In fact, there is no particular connection between a state government’s partisan lean and budgetary woes, with deep-red ones among the hardest hit. Much variation derives from states’ relative reliance on sales taxes (which have shrunk in tourism-reliant states such as Louisiana), as opposed to income taxes (which have poured in to California, where the denizens of Silicon Valley made a killing in the unexpected stock market boom).
The impending budget surplus in California does create a new — better — argument against general federal support for states: Many don’t need it, because they are doing pretty well on their own.
That’s probably true even when you factor in the additional spending burden all states, including California, are facing because of covid-19, but for which they already received targeted federal assistance from previous relief bills — much of it still unspent.
Biden’s $350 billion request seems high; public-sector layoffs are a concern, but many so far have resulted from school closings rather than budget cuts per se and should end as schools reopen. Government support for the economy generally, through small-business loans and unemployment insurance, has indirectly but significantly helped the states by maintaining the capacity of workers and firms to earn — and pay taxes. The Fed’s zero-interest policy has goosed the stock market, which helped, too.
Without needing an act of Congress, Biden extended more-generous rules on Medicaid reimbursement through 2021, which provided states $44.5 billion, according to the Center on Budget and Policy Priorities.
CBPP’s latest estimate of the revenue shortfall for all states, localities, tribal nations and U.S. territories through fiscal 2022 is about $300 billion; this is the basis for the Biden administration’s $350 billion request, which also factors in spending needs, according to White House officials.
A recent Moody’s Analytics report produced a more modest estimate: $165 billion, but if states tapped all of their reserves, it would be just $86 billion.
In theory, Congress could offer states low- or zero-interest loans, instead of grants, as my colleague Steven Pearlstein has suggested. Then the states themselves would decide who gets federal support, and how much, in return for accepting “skin in the game.” State prohibitions on long-term borrowing may pose an obstacle to this approach, however.
In an ideal world, Biden would see this as an opportunity to craft a lean, flexible solution to a problem that is real but hard to specify; and the GOP would engage, in good faith, on that basis. As you may have noticed, we do not live in an ideal world.