State and local governments face pandemic-induced revenue shortfalls that could total $500 billion, which could prompt aid from Congress or force cuts to programs and government employment for years to come.
The lack of funding comes as states face dwindling revenue streams. The shuttering of businesses means that state sales taxes are not being collected. The flood of job losses also means states are collecting less income tax as unemployment benefits rise. Several states have also postponed tax payment deadlines.
The scarcity of tax collections means that total state budget shortfalls could be the largest on record, according to the left-leaning Center on Budget and Policy Priorities. It projected a $105 billion shortfall in 2020, a $290 billion deficit in 2021, and a $105 billion shortage in 2022.
Meanwhile, all states, except Vermont, are required to maintain balanced budgets. With revenues projected to plummet, the states must either raise taxes, which is not a good idea during an economic crisis, or cut spending to balance their budgets, said Stan Veuger, an economist at the right-leaning American Enterprise Institute.
“If they can’t raise taxes, they have to cut spending, which would be terrible right now because the last thing we want are more layoffs and more cuts in services people rely on more heavily than they normally would,” he told the Washington Examiner.
Cuts in spending at the state level equate to layoffs or a reduction in medical care, according to Veuger.
“In the big picture, what states and local government spend their money on is education and medication,” he said. “So, either you fire a bunch of people or stop paying for the healthcare of poorer people. These things are not good ideas,” he said, adding that “that only leaves the federal government backstopping the state governments.”
Job losses of state and local government workers could be the next wave of layoffs and could factor into a weakened labor market for years. Hundreds of thousands of teachers and other public sector workers lost their jobs in the wake of the 2008 financial crisis, and the sector never fully recovered.
The federal government could send states and cities funds to fill the gap, but the prospects for such assistance are murky.
The National Governors Association on Tuesday requested $500 billion from Congress to help states and territories. NGA Chairman Larry Hogan, the Republican governor of Maryland, told Politico on Thursday that President Trump supports the proposal. It’s not as clear that congressional Republicans will agree.
Congress this week approved an additional $484 billion in funding to respond to the crisis but excluded aid to local municipalities, despite Democrats’ demands. Senate Majority Leader Mitch McConnell, a Republican from Kentucky, considers it a bailout for blue states that might use the money to shore up underfunded pension liabilities.
“There’s not going to be any desire on the Republican side to bail out state pensions by borrowing money from future generations,” McConnell told radio host Hugh Hewitt on Wednesday.
Hogan’s state, which is considered blue but has a red governor, faces a $2.8 billion shortfall.
“We could be in a terrible financial situation,” Hogan said, if Congress does not include the funding request in the next round of legislative relief.
House Majority Leader Steny Hoyer, a Democrat from Maryland, on Thursday said the next package will include funding “for states and communities so they can help teachers, first responders, and essential employees at the local level.”
Relief for state and local governments was included in the recently enacted CARES Act, which provided $150 billion to combat the virus. The money cannot be used to fund revenue shortfalls, though. As of Wednesday, the Treasury Department has disbursed nearly two-thirds, or $95 billion, of the money to state and local governments, according to the Peter G. Peterson Foundation.
