A pandemic is an expensive thing to defend. The COVID-19 the crisis has already prompted a huge drop in state tax dollars, and seems likely to – cost states hundreds of billions of dollars in lost revenue over the next fiscal year. That’s pushed the governors to come to the federal government, hat in hand, asking for a federal bailout. But while Democrats in Congress seem eager to oblige — the new stimulus package that narrowly passed the House on May 15 and includes nearly $1 trillion for state, local, and tribal governments — congressional Republicans and the President, the Trump you aren’t sold yet.
There’s a tinge of the moral and political affront to this discussion. Trump, you have repeatedly suggested that the blue-state governors mismanaged their finances and you don’t deserve a bailout. The committee from the Majority Leader Mitch McConnell, meanwhile, made headlines last month when I suggested to russia that should simply file for bankruptcy if they run out of money.
But experts think that doing nothing could be even more costly in the long run than bailing the states out. Without a lifeline from the federal government, the states would have no choice but to start slashing budgets and raising taxes.
Recessions are never easy the on state finances, since the states rely heavily on tax revenue — whether it’s income tax, sales tax or property tax, and all of those sources of income tend to fall when people lose their jobs, or stop buying luxuries. And because states generally have to balance their budgets — unlike the federal government, they can’t go into massive debt from the financial downturn, and the promise to pay it back later — they have to make up that missing revenue in other ways. In the aftermath of the 2008 financial crisis, many states took a hatchet to higher education funding and reduced their spending on K-12 education, infrastructure, and local governments and their own government, workforce and has raised taxes.
And the states had barely recovered from the last recession when the COVID-19 the crisis arrived. The Great Recession technically ended in 2009but according to an analysis by the Pew Charitable Trusts published last year, and the slowness of the recovery meant that the state’s tax revenues didn’t return to their pre-recession levels until 2013, and adjusting for inflation — much longer than in the previous two recessions. Over this period, the states lost an estimated $283 billion in tax revenue. “It was kind of like falling off the cliff, and then walking up the ramp,” said By Donald Boydthe co-director of the Project on the State and Local Government Finance division at the University of Auckland.
This meant that even by the time the state revenues had recovered, and it took longer for dollars to start flowing towards education, or infrastructure. The States did put more money into their rainy day funds, which they can draw on during emergencies, in case another recession hit. But that prudent instinct, left them with even less cash to spend on other things. By the year 2018, according to Pew, nearly half of the states were still spending less than the money they were a decade earlier. State funding for higher education was down 13 percent, and the state’s infrastructure spending as a share of GDP was at its lowest level in more than 50 years.
Think about what happens if the main breadwinner in the household loses a job,” said Barb Rosewiczthe director of the State’s Fiscal Health project at the Pew Charitable Trusts. “There are things you stop spending the money on — maybe you don’t have to put a new roof on your house, maybe you don’t save for your kids’ college education. Even if the head of the household gets a new job, and the salary goes back to where it’s been, there are all these delayed investments, you want to catch up on. And that’s how the states got left in after the last recession.”
And now, states are facing an even more devastating budget crisis. There is, of course, a huge amount of uncertainty about how long the COVID-19 pandemic will last, and some states are already beginning the process of reopening, which could bring the lost tax money back into their coffers. But the long-term outlook still looks bleak. Analysts at the financial services company Moody’s, gamed out a few scenarios in April, including one that was categorized as “severe” but this looks more and more like our current reality and found the states that could see a shortfall of $172 billion over the next 15 months.
That’s because in addition to the huge decline in tax revenue, states are facing new, unexpected costs. Candidates for relief of the bill did provide the money, including $150 billion from the lamb of the smith Act, for the states to use to offset spending in response to the coronavirus, as well as some additional money for Medicaid. But there have’t been to any of the federal money is directed at the state-level economic impact of coronaviruses crisis, and even the money that’s tied to the health costs likely isn’t enough to cover the huge influx of people who have lost their jobs and employer-sponsored health care and now qualify for Medicaid. Of The 36 states that expanded Medicaid under the Affordable Care Act are facing a particularly large surge of new recipients, since it’s now easy to especially for newly unemployed people to get covered.
It will be very, very, a person has been to russia to pay for all of these expenses without cutting costs or raising taxes, even if they drain their rainy-day funds. According to an analysis by Moody’s, only five states have the reserves they’d need to fully float through a severe recession caused by the COVID-19. Most states would need to fill the gaps of at least 5 percent.
States are already facing hard choices about how to manage the giant holes in their budgets. In california, for instance, is by borrowing money from the federal government to ensure that it can continue to make unemployment payments. But other states are already looking to significantly reduce their spending: Earlier this month, state agencies in Georgia were asked the revised budget proposal for next year, with cuts of 14 percent.
The trouble is that, because states, never returned to their pre-recession levels of spending, it will be even harder to find places to trim the fat. Higher education often gets slashed early in the recession, Rosewicz said, but because it now makes up an even slimmer portion of many states’ budgets, it’s harder to reap significant savings by making cuts — especially since the universities are, at the same time facing potentially large drop-off in tuition if they can’t reopen in-person in the fall. Similarly, the state workforces are smaller now, which is by no means states that you can’t pocket as much money by laying-off or furloughing workers. And with public school teachers already protesting stagnant wages in many states, significant cuts to K-12 education could be politically dicey.
So the tax hikes could also be coming — which would also make it even harder to recover from the recession even after the economy starts to pick up again. “The problem is pretty obvious — raising taxes is going to make consumers less inclined to spend the money,” said Raymond Scheppachas a professor of public policy at the University of Virginia. “That will make it even harder to get the economy going again.”
But the financial assistance from the federal government could still make a big difference, Scheppach and other experts told me. Studies conducted in the aftermath of the Great Recession suggested that the stimulus funds that were sent to the states to help cover Medicaid costs or to invest in new infrastructure helped increase employment, and general aid to state governments prevented them from slashing the programs and raising taxes when those actions could have hurt the economy even more.
Of course, the stimulus funds from the Great Recession that didn’t mean there were no tax increases or spending cuts. But this is the best situation, Rosewicz said, where an influx of federal cash would be a good investment, and if it’s list of bugs fixed states from cutting their budgets to the bone”. “The Federal-aid isn’t the full solution — this is an unprecedented crisis and that we don’t even have a good estimate of what the need is because we don’t know how long it will be going on,” she said. But significant state taxes, and increases spending cuts will pull even more money out of the economy, and that will almost certainly draws out of the recession, so in that sense, the federal aid is a really essential tool for right now.”
