COVID-19

As tax income shrivels, state budgets face a pandemic reckoning

Justin Ho Jul 29, 2020
Heard on: Marketplace
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A cleaning crew disinfects a New York City subway car. Much of the money states received from the federal government has gone toward preventing the spread of the coronavirus. Stephanie Keith/Getty Images
COVID-19

As tax income shrivels, state budgets face a pandemic reckoning

Justin Ho Jul 29, 2020
A cleaning crew disinfects a New York City subway car. Much of the money states received from the federal government has gone toward preventing the spread of the coronavirus. Stephanie Keith/Getty Images
HTML EMBED:
COPY

Early in the pandemic, the Federal Reserve set up a lifeline for state and local governments. It’s called the Municipal Liquidity Facility, and it’s a program that state and local governments can tap if they’re in need.

By and large, they are in need — state tax revenue is down, spending is up and red ink is everywhere.

State budget shortfalls are already having serious consequences, said Nick Johnson, who follows state fiscal policy at the Center on Budget and Policy Priorities.

“In April and May alone, states and localities have either furloughed or laid off 1.5 million workers — about twice as many [as] in the entire aftermath of the Great Recession,” Johnson said.

States got a round of funding from the federal government in March, but that money has already been budgeted. 

Tracy Gordon, a senior fellow at the Urban-Brookings Tax Policy Center, said states are using it to disinfect public spaces, make correctional facilities safer and transition to online learning.

“It’s unclear that the amount that was appropriated in March — when we didn’t realize how long this crisis would endure — is sufficient to those kinds of challenges,” Gordon said.

Without more federal aid, states don’t have many options. They could borrow more, like from the Fed’s Municipal Liquidity Facility.

But Abby Urtz, senior vice president at FHN Financial, said many states are required to balance their budgets every year.

“It’s really uncomfortable for them to go out into the markets, or to tap a Fed facility or other loans to borrow for cash flow,” she said.

Giving states money is the most effective way for the federal government to shore up the safety net, Gordon said.

The thinking, she added, is we recognize that you’re better at providing these services because you know your populations, you know your costs, you know your geographies.

State and local governments, Gordon said, represent around 12% of the country’s GDP.

Helping them helps the rest of the economy, too.

COVID-19 Economy FAQs

With a slow vaccine rollout so far, how has the government changed its approach?

On Tuesday, Jan. 12, Health and Human Services Secretary Alex Azar announced changes to how the federal government is distributing vaccine doses. The CDC has expanded coronavirus vaccine eligibility to everyone 65 and older, along with people with conditions that might raise their risks of complications from COVID-19. The new approach also looks to reward those states that are the most efficient by giving them more doses, but critics say that won’t address underlying problems some states are having with vaccine rollout.

What kind of help can small businesses get right now?

A new round of Paycheck Protection Program loans recently became available for pandemic-ravaged businesses. These loans don’t have to be paid back if rules are met. Right now, loans are open for first-time applicants. And the application has to go through community banking organizations — no big banks, for now, at least. This rollout is designed to help business owners who couldn’t get a PPP loan before.

What does the hiring situation in the U.S. look like as we enter the new year?

New data on job openings and postings provide a glimpse of what to expect in the job market in the coming weeks and months. This time of year typically sees a spike in hiring and job-search activity, says Jill Chapman with Insperity, a recruiting services firm. But that kind of optimistic planning for the future isn’t really the vibe these days. Job postings have been lagging on the job search site Indeed. Listings were down about 11% in December compared to a year earlier.

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