States Prepare for Coronavirus Fiscal Storm

States Prepare for Coronavirus Fiscal Storm

State budgets will be crushed by the coronavirus crisis as millions of workers and businesses stop paying taxes, says Josh Goodman of Pew Charitable Trusts. But state officials are going to have to wait a few more weeks until they know just how bad their fiscal situations will be.

Personal income taxes and sales taxes are the two largest sources of revenue at the state level, and both will take a serious hit as businesses reduce hours or close up shop entirely and workers lose their jobs.

Federal aid is in the pipeline, with $150 billion set aside for states and localities in the $2.2 trillion aid package signed into law last week. But some governors are saying that won’t be enough.

Colorado is one state seeing a rapidly deteriorating fiscal picture, according to Bloomberg Tax. Two weeks ago, state officials projected a $750 million shortfall in revenue this fiscal year and next as a result of the pandemic. A week later, that number nearly doubled to $1.4 billion.

New York, at the epicenter of the crisis, is facing even larger shortfalls. Gov. Andrew Cuomo says the state expects to lose between $10 billion and $15 billion in revenues in the fiscal year starting April 1. In just one week, the state spent $600 million on medical supplies, according to Bloomberg News.

States face legal limits: Most states are required to balance their budgets, and only a handful can carry debt from one year in the next. That leaves three options when the economy craters: using federal aid to replace lost revenues; dipping into rainy day funds, to the extent that they exist (see the Tax Foundation’s review here); and enacting budgetary austerity in the form of reduced spending on everything from education to highway repair. Accounting tricks such as shifting the schedule of payments can provide a cushion, but the wiggle room is limited.

The timing is terrible: States tend to have low cash balances in March as they prepare for an influx of tax payments in April, but as many states follow the IRS in delaying tax day until July, those payments are now just a trickle.

In addition to the operational challenges, the shortfalls will make it harder to create budgets for the next fiscal year, which starts on July 1 in most states. Budget committees typically rely on revenues in January and February as the basis for the next year’s budget, but that won’t work in this context. “It’s been challenging,” said Colorado state senator Rachel Zenzinger. “We had the budget about 98% done before the virus hit, so we’re going to have to more or less scrap many of the decisions we already made and start over.” Social distancing requirements in state legislatures will make the process that much harder.

Time for a debt jubilee? The size of the problem is so great that some experts are kicking around the idea of large-scale debt forgiveness. Michael Hudson, an economist at the University of Missouri at Kansas City, told Marketplace Thursday about the ancient tradition of the debt jubilee, in which all debts are forgiven on a regular basis in order to reduce economic volatility and social disorder.

“The reason your cancel the debts is you want to preserve stability,” Hudson said. “The states and localities, New York City and New York state, have to pay unemployment insurance, and all the other costs associated with the coronavirus out of their own revenues, and yet they have to balance the budget. If New York state and City have to repay all of the debts that they run up, then you’re going to have the whole character of government change. And in order to prevent the economy from being distorted, you have to adjust [and] simply say these debts won’t be paid.”

Until then: Short of a revolutionary debt holiday, states will have to start adjusting to the mounting revenue shortfalls and rising social welfare expenditures, with cutbacks being one likely result. “Lower taxes and increased demands for funding will impose severe strains on state and local budgets,” researchers at the Brookings Institution wrote last week. “Furthermore, with most state fiscal years ending June 30, and with most states required to enact budgets that they expect to balance, it is likely that state and local governments will start paring back spending relatively soon.”