The success of Covid-19’s state and local revenues is less than many feared

A flood of federal aid for businesses and households helped boost consumer income and spending. Unemployment fell and economic activity rose much faster than expected. Unlike previous recessions, equity and housing markets have fared well.

All of these factors boosted state and local revenues last year. But pandemic-related costs have risen in many localities, leading to budget holes that could force states to cut other services, lay off workers or raise taxes, if there is no more federal aid. Policy analysts estimate that the loss of state and local revenue due to the coronavirus pandemic will amount to about $ 300 billion by fiscal year 2022, although that does not include increased spending.

State and local governments employ 18.6 million people, who provide services ranging from garbage collection to teaching children. Congress Democrats are pushing $ 360 billion in aid to cities and states as part of President Biden’s $ 1.9 trillion coronavirus relief bill, while many Republicans argue it would only encourage tax exclusion.

Immediately after the coronavirus outbreak last March, states reduced revenue projections by about 8% on average, and some expected deficits of 20%. These projections were largely based on experiences during the 2007-09 recession, when sharp declines in revenues lasted several years.

In the end, state revenues fell 1.6% in fiscal year 2020 and were 3.4% lower than projected before the pandemic, according to the National Association of State Budget Managers. While states expect revenue to decline 4.4% in fiscal 2021, which ends June 30 for the majority, 18 states see revenue reach above forecasts.

“The revenue problem hasn’t been as bad as we thought,” said Michael Strain, director of economic policy studies at the conservative American Enterprise Institute. “That’s good news.”

The bad news, according to Mr. Strain and more: an increase in spending on things like health care, unemployment benefits and food assistance. In addition, revenue losses vary significantly between states and cities.

“If you’re a state that’s getting worse, the fact that, on average, states seem to hold up pretty well doesn’t really matter to you,” Strain said.

Lack of state and local budgets has been at the center of discussions in Washington since last spring about what to include in another financial aid package.

Congress has provided state and local governments with more than $ 300 billion in federal aid, including education grants and higher federal funds for Medicaid, although the funds entailed restrictions on how they could be spent. Now, some Republican lawmakers are proposing more money for schools and pandemic-related spending, such as vaccine distribution, but there is no specific funding for state and local governments.

The Left Center on Budgetary and Policy Priorities estimates that the lack of state and local revenue will amount to about $ 300 billion by 2022, as does Louise Sheiner, director of the Brookings Hutchins Center for Fiscal and Monetary Policy. Institution. Moody’s Analytics puts the figure at about $ 330 billion, well below the $ 500 billion it estimated last spring.

State and local governments also have about $ 75 billion in rainy day funds to make up for budget shortfalls. But analysts said it is unclear how much spending has increased due to the pandemic, making it difficult to estimate how much they may need.

Strain estimated that $ 100 billion, in flexible funding, would be more than enough to help states get through the next fiscal year, which they should now start planning.

From last March, when a nationwide pandemic emergency was declared, to December, overall state revenue fell 1.8% from the same period last year, according to researcher Lucy Dadayan senior associate of the Urban Institute, a Washington think tank. Twenty states experienced increases, including six (Vermont, Idaho, South Dakota, Utah, Colorado and Alabama) that increased revenue by more than 3%. California, whose revenues remain stable, expects a budget surplus for this year.

By contrast, 26 states reported declining revenues in the first ten months of the pandemic, including nine, where revenues fell more than 5%. Five states — Alaska, Florida, Hawaii, North Dakota, and Oregon — experienced double-digit declines.

“All states have been impacted by the recession, but they have been impacted in different ways, by different magnitudes,” said Brian Sigritz, director of state tax studies at NASBO.

The differences depend in part on the revenue structure of the states and the unique features of the current recession.

States that rely more on revenue from services and tourism, such as Florida and Hawaii, have been hard hit because the pandemic limited travel and caused restrictions on restaurants, entertainment and other face-to-face businesses. States that depend heavily on the energy industry, such as Alaska, Louisiana and Texas, have also seen revenues fall sharply as oil prices fell.

On the other hand, states that are more dependent on income taxes and have more progressive tax systems, such as California, have done better than expected. This is because the pandemic has primarily affected low-income taxpayers, who provide a smaller share of global income.

In Mesa, Arizona, revenue has been steady over the past ten months. “But that doesn’t really tell the whole story,” Mayor John Giles said.

The city government is the “zero point” for pandemic relief, coordinating with hospitals, food banks, schools and other providers to provide essential services to a population of 500,000, Giles said. Mesa received $ 90 million from last year’s Pandemic Care Act.

“We could have filed twice as much in the Covid-related assistance bills in which the city was involved,” Giles said.

From the window of the City Hall office, the Republican mayor said he saw thousands of cars lining up each week in front of the Mesa convention center to pick up free groceries. This program will expire at the end of February without additional help.

“People need to recognize what’s obvious, which is the critical role that local government plays in the economy,” said Giles, who urges Arizona Republicans in Congress to support state and local aid. in the next relief package.

While general incomes have been resilient, layoffs of government workers have risen sharply, especially among education workers. While some of this can be explained by the pandemic, there is evidence that states with higher income losses have experienced larger reductions in local educational employment, Ms. Sheiner of the Brookings Institution.

State and local employment has also recovered slowly, compared to other sectors, and remains 1.3 million jobs below its pre-pandemic level.

“This is a clear point of evidence that there is an issue that has not been addressed,” said David Kamin, deputy director of President Biden’s National Economic Council. “With a stronger response that would have given more relief to states and localities before, we might not have seen the kind of layoffs we saw last year.”

—Hannah Lang contributed to this article.

Write to Kate Davidson to [email protected]