Listen to any of the architects of the $1.9 trillion spending package winding its way through Congress—from Treasury Secretary Janet Yellen to White House economic adviser Brian Deese—and they will tell you the aid is urgently needed to rescue the economy.
It is, they insist, simply relief for Americans struggling to get through the pandemic.
But at least one important slice of the package—the nearly $200 billion being earmarked to state governments—goes beyond a rescue and is almost certain to further stimulate an economy that is already beginning to rapidly recover.
That’s because those proposed cash transfers are more than six times greater than the approximately $31 billion of expected tax revenue that disappeared in the current fiscal year, according to pre-pandemic and more recent forecasts compiled by Bloomberg. In other words, that money could make up for that loss and be plowed back into states’ economies, such as their own version of relief checks, infrastructure projects and more, depending on the federal guidelines around the aid.
That would give states an improbable role in spurring the recovery and end the steady budget cutting that has weighed on the economy since March and already eliminated more than 1.3 million state and local government jobs, nearly twice as many as were lost after the last recession. Yet it has also set off a debate in Washington over whether some of the money should be cut or shifted to other priorities that could provide a more immediate impact than funneling it through sometimes slow-moving state governments. Local governments would get another $130.2 billion under the bill that has already passed the House.
“If the whole point of this bill is to stimulate economic activity, the federal government has ways of doing that, that may be more efficient than sending checks to state and local governments,” said Dan White, the director of public sector research at Moody’s Analytics, which estimates that states would need a total of $56 billion to cover shortfalls through 2022 once previously allocated aid is taken into account.
Based on state revenue projections made before the pandemic and more recent ones revised through the end of February, revenue is expected to be down by a weighted average of about 3% in 2021 compared with expectations before the pandemic, according to an analysis by Bloomberg. The numbers include forecasts from all 50 states made by budget officials, revenue forecasting entities and governors’ offices.
The forecasts cover fiscal year 2021—which ends in June for almost all states—or the biennium that includes it. The figures include states’ general funds as well as special funds in cases where they receive a significant amount of specific tax collections, such as Michigan’s School Aid Fund.
Fiscal Hit
The revenue tallies are just one way to gauge the impact that the virus has had on states and doesn’t account for the jump in costs during the public health crisis. In some cases, the toll may be understated because tax deadlines were shifted into July. In Illinois, for example, that change inflated this year’s revenue collections by about $1.3 billion, according to Carol Knowles, a spokesperson for the Governor’s Office of Management and Budget.
Moreover, the fiscal hit could continue into next year, depending how final tax collections shape up, and states face additional costs associated with the pandemic. States have also borrowed more than $50 billion from the federal government to cover a deluge of jobless claims.
Cities and counties have also been calling for aid throughout the pandemic, and their lobbying groups have been supportive of the Biden administration’s $350 billion total lifeline to states and municipal governments. Metropolitan areas like New York City have been upended by Covid-19, which devastated its tourism and hospitality industries. The rise of remote work has also raised longer-term concerns about a shift away from urban centers. The city’s Independent Budget Office said in a report that it lowered its forecast of tax revenue in 2021 by $4.4 billion versus its projection in January 2020.
Uneven Impact
Even so, by all accounts the financial impact overall has been far smaller than initially feared when Covid last year sent the U.S. economy into the deepest recession since World War II, which left governors nationwide bracing for the gravest fiscal crisis of modern times. In April, the National Governors Association called for Congress to provide $500 billion to cover expected budget shortfalls.
Deficits on that scale were averted after the federal government pushed through stimulus plans in March and again late last year, driving stocks to record highs and promising to increase collections of capital gains taxes. The magnitude of the shortfalls also reflects the unusually uneven nature of the recession: While lower paid service industry employees were thrown out of work, the highest earners who pay far more in state taxes were less affected because they were able to work from home.
The result has been in some cases dramatic. California, a state that’s heavily dependent on income-tax revenue from the highest earners, is seeing revenue collections run about 10% more than was anticipated in the budget for the fiscal year that will end in June. In Oregon, the pandemic-era revenue losses “pale in comparison” with those of previous recessions, forecasters wrote in a Feb. 24 dated report.