States can expect to see a 20% drop in tax revenues on average due to the coronavirus slowdown, and the 10 hardest-hit states could experience losses of more than 30%, according to a new analysis from a pair of economists published over the weekend. New York, the epicenter of the crisis, will likely see the biggest losses, with revenues falling by about 40%.
Examining 25 years of economic data, the researchers found that states record a 1.56 percentage point increase in tax receipts for every 1 percentage point rise in employment, with the revenues flowing primarily from higher sales, corporate and individual income taxes. Extrapolating from the results, the economists estimate that states will lose about $63.7 billion in revenues in the coronavirus recession, with the average state seeing a 20% drop, or $1.25 billion. (Both revenue figures are in 2012 prices.)
On Monday, New York State Comptroller Thomas DiNapoli provided some anecdotal evidence that jibes with the analysis, announcing that sales tax revenues for local governments in the state had fallen 32% in May compared to the year before.
Why it matters: Economists worry about the negative effects of fiscal belt-tightening at the state level. “Budget shortfalls are forcing state and municipal authorities to cut jobs and spending, as they did after the 2008 financial crisis when local austerity held back the economy’s recovery,” Bloomberg’s Alexandre Tanzi said Monday, adding that “Congress is deadlocked over sending more cash to the states to plug the gap.”