COVID’s Summer Hot Spots

Update 451: COVID’s Summer Hot Spots
Argue for Targeted, Automatic Relief Fix

No economic relief or bill, regardless of size, will be scrupulously equitable as regards state, sector, class, generation, etc.  Nor would equity on every basis be optimal in all circumstances. Today, Montana and Vermont are both marginally affected by the Coronavirus.  Should relief for those states be equal per capita to say, New York, Michigan, Texas? Few would say yes.

With states entering new fiscal years next week, we ask, where should the marginal federal assistance dollar go to keep them running?  Until now, CARES, HEROES, and the other relief legislation has barely considered stimulative value and local economic conditions.  We point out below the enormous disparity in states’ exposure to COVID and, therefore, their fiscal circumstances.  

We suggest that more targeted relief reflecting reality in the states is not only called for but is a more equitable policy.

Best,

Dana

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Next Wednesday, July 1, 46 states and many local governments will begin a new fiscal year.  Facing both a pandemic and recession, states have struggled to pay for necessary public health equipment and to keep up with sudden demands on social safety net programs. Meanwhile, revenues are falling as tens of millions of taxpayers lose their jobs. 

States are already announcing cuts to programs and massive layoffs of public employees. Below, we examine the fraught situation faced by state and local governments, the implications for budgets and the upcoming election, and potential solutions. 

Nationwide Shortfalls; Spots in Free Fall

At the start of 2020, states expected increases in spending and revenues of around three percent. Now, tax revenues are cratering at the exact moment that states need to increase spending.

About two-thirds of states’ revenues come from sales and income tax receipts, both of which have been devastated by the shutdowns and heightened unemployment. Per Brookings, a one percentage point increase in unemployment coincides with a roughly $40 billion decrease in state tax revenue. Unemployment jumped roughly 10 points between February and May. 

Revenues have dropped so dramatically that less than half of all states have released updated forecasts. Available state estimates are grim. In the table below, we highlight state revenue estimates for the six states with the highest unemployment rates, in order, as of May. In parentheses is that state’s national unemployment rank as of December 2019.

Fiscal Status of High Unemployment States

(note: estimated declines are based on pre-COVID state revenue forecasts)

Sources: Bureau of Labor Statistics, Center for Budget and Policy Priorities

The Federation of Tax Administrators, which advises state tax authorities, projects a nationwide loss of $150 billion in tax revenue collection between April and the end of June. In nominal terms, this revenue loss is 50 percent larger than the $100 billion that states missed out on during the three years of the Great Recession combined. 

Public Sector Jobs, Service Cuts Coming

Forty-nine states and the District of Columbia have balanced budget laws. Balanced budget laws prevent states from running deficits, which requires them to cut services and jobs when revenue declines. States and local governments have laid off or furloughed 1.5 million workers, primarily in the education sector, since the start of the pandemic. The Center on Budget and Policy Priorities predicts that state budget shortfalls will total $615 billion from 2020-2022, forcing states to further slash programs and jobs. And per Moody’s Analytics, state and local governments need at least $500 billion in additional federal aid to avoid four million public employee layoffs. 

Following the 2008 recession, states cut budgets by 3.8 percent in FY 2009 and 5.7 percent in FY 2010. These cuts likely prolonged the recovery; the Hutchins Center Fiscal Impact Measure shows that from 2008 through 2014, state and local fiscal policy lowered GDP by 1.7 percent. 

Now, states are looking at cuts even greater than those undertaken during the Great Recession. Georgia Governor Brian Kemp and Ohio Governor Mark DeWine have instructed their state agencies to prepare for massive cuts to their budgets, up to 10 or even 20 percent, respectively. Without further federal aid to fill in these cuts, the impact on the recovery may be disastrous. 

Democracy: A Key State Budget Line-Item

State and local governments will administer the general election in November. State primaries have seen record numbers of mail-in ballots cast this year, overwhelming unprepared and underfunded election offices. At the same time, public health concerns have led state officials to limit the number of in-person polling places. In recent updates, we have written about the logistical issues that election officials face this November and the accompanying threats to the franchise. 

While it may be difficult for state and local governments to rationalize diverting funding towards vote-by-mail infrastructure and the necessary PPE for poll workers, Congress can act. Per the Brennan Center, ensuring a universally available vote-by-mail option, maintaining safe, in-person polling sites, developing online registration portals, and a nationwide campaign to educate the public on their voting options this fall will cost $4 billion.

The Automatic Option

Congress should consider making changes to levels of aid to state and local governments tied automatically to macroeconomic indicators. During the Great Recession, automatic stabilizers provided essential economic stimulus long after discretionary spending programs ended. Via automatic stabilizers, federal aid to particular states would immediately increase once their unemployment rates reach a certain point, thus avoiding the ad hoc, post hoc approach taken so far. 

Automatic Stabilizers as Stimulus

Source: Hutchins Center at Brookings and CBO (2019)

Rep. Don Beyer and Sens. Jack Reed and Michael Bennet have proposed the Worker Relief and Security Act, which would tie the CARES Act’s expanded unemployment insurance to state unemployment rates. This would help ensure that workers in states suffering the most receive the highest benefits and that expanded UI benefits do not end before state economies have recovered. While Speaker Pelosi has endorsed the idea of automatic stabilizers, they were not in the HEROES Act passed by the House in May.  

Congressional Republicans have repeatedly opposed additional federal aid to states, with Majority Leader McConnell making the astounding suggestion in April that states go bankrupt.  But Republican and Democratic governors alike are vying for further federal assistance, and even Federal Reserve Chair Powell has stated his support for more fiscal aid to state and local governments.

Without Congressional action, states may have no choice but to cut spending, jobs, and basic services drastically.