Rich states discover tax contingencies, which reduce the pressure to get more aid

Photographer: David Paul Morris / Bloomberg

He was a shocking and seemingly unlikely figure.

Eight months after the pandemic, and the brutal economic collapse it caused, the California budget watchdog said the state was ready to pocket about $ 26 billion. Just as New York and Connecticut had revealed weeks earlier, tax revenue was coming to a clip that no one expected, thanks in part to stock market growth.

And so it has been played largely nationwide this year, albeit to a lesser extent in many of the less affluent states. The fiscal apocalypse that is expected to empty massive holes in state budgets has not arrived, at least not yet.

In turn, this provides fuel to the argument of some Republicans that additional federal aid for states and municipalities can wait until next year instead of settling on the aid package that is now being is carefully debating in Washington. As the two sides end up closing a possible deal, this help remains one of the key points.

“In some ways, U.S. taxpayers have saved some money by delaying the stimulus package so that they can really get within the reach of the revenue aspect,” said Jennifer Johnston, director of research at the Franklin Templeton Fixed Income municipal bond team.

There are several important warnings in this slightly pink image, to be clear.

On the one hand, many states and cities still face large deficits, not as large as initially anticipated. In addition, the rise in Covid-19 cases could lead to further economic downturns, which could reverse the nascent recovery that local governments have seen so far. Most of California is back under home stay order and New York could head to another. And because of the lag in tax collection, states have historically struggled with large deficits very well after the recessions ended.

However, financial forecasts have improved considerably in recent months. In the spring, Congress Democrats had sought $ 1 trillion in aid for states and municipalities. At the time, states were expected to report total budget deficits $ 650 billion by fiscal 2022; that figure is now projected at about $ 400 billion, according to the Center for Budgeting and Policy Priorities. And Democrats are currently pushing for just $ 160 billion as a first step.

The muni bond market, driven by lower benchmark interest rates, also shows that investors are not worried about an approaching fiscal crisis. States including Pennsylvania, Michigan, and California can borrow for ten years at rates well below 1%, a historically low threshold. Even a benchmark of Illinois ’near-gross debt yields only 2.76%, around the level reserved only for borrowers with the best score two years ago.

California is an excellent example of the change in tax accounts. In May, it closed for a $ 54 billion two-year difference. He now projects only a $ 5 billion deficit next year after getting a $ 26 billion contingency by accumulating more tax revenue and investing less than expected. New York City, which was the epicenter of the coronavirus crisis, grossed $ 985 million more than expected during the first four months of its fiscal year thanks to a year of advertising on Wall Street.

The surprise highlights the disproportionate impacts of the outbreak and the shutdown of the business. Workers with lower incomes for face-to-face industries such as restaurants lose their jobs, while richer people work from home, buy goods online and sell stocks, generating the income on which states rely to balance their books.

Stock markets have thrived, both due to Federal Reserve rate cuts and the prospect of an economic rebound in 2021, and initial public offerings have coined a new class of wealthy Americans, a boost to states like New York and California that have tax systems.

In California, which earns nearly half of people’s income tax revenue from 1% of employees, three former Stanford University students became billionaires from the IPO of their San Francisco-based food delivery company, DoorDash Inc.

“For those lucky enough to maintain employment and income during this pandemic, their financial situation is better than before,” UCLA economists Anderson said in a December report. “These households have been able to accumulate at least $ 1.6 trillion in additional savings.”

Internet sales

And many have continued to spend. Because states are allowed to tax Internet sales of businesses outside their borders, city governments have benefited from people who buy from home. Texas, which gets the largest source of sales tax revenue, has seen the biggest gains in the past twelve months from $ 1.25 billion in online retail revenue, driver Glenn Hegar said last month. In California, where some of the nationwide broader Covid restrictions are on businesses, sales tax revenues are roughly the same as in the previous year.

Regions have had different experiences given the variation in public health restrictions, and some are now just beginning to do so. feel the pain, said Irma Esparza Diggs, director of federal defense for the National League of Cities. “This pandemic has not affected our state and local governments in the same way at all times, which has been the difficulty of conveying in Congress is what we are losing, ”he said.