The first day of school in most states is right around the corner. But parents all across the country have little idea what the school year will really look like for their children, whether it’s virtual, in person, or a blend. At least families know their children will start school, in some capacity, even in the middle of a pandemic.
States and localities will somehow assure their residents that schools will start while trying to figure out how to maintain services while their tax revenues crater. Nearly all states are restrained by balanced-budget restrictions. Absent sufficient revenue, these states will have to cut services or raise taxes.
And they can’t count on additional federal assistance. Congress is nowhere near an agreement on the next coronavirus relief package, and the two parties are especially far apart on how much additional federal aid to send to state and local governments. It’s been a worrying situation for months. Now, we should be alarmed.
Flashing lights: The federal government has helped, but not nearly enough.
In March, the Coronavirus Aid, Relief, and Economic Security (CARES) Act allocated $150 billion for a Coronavirus Relief Fund dedicated to state and local governments. In addition, over $60 billion was appropriated for specific services provided by state and local governments, with about half earmarked for an Education Stabilization Fund. (This was in addition to significant relief passed though the Families First Coronavirus Response Act.)
Days after the CARES Act passed, my TPC colleagues Richard Auxier and Tracy Gordon predicted that significant level of support might still soon fall short. Richard and Tracy were right. States have already made claims on the Coronavirus Relief Fund for expenses incurred in fiscal year 2020 and expected in fiscal year 2021, which started in July in most states. Treasury's interim report on the fund shows that states and localities have incurred or expended approximately 25 percent of the funds received, but a survey of members of the National Association of State Budgets Officers shows states and territories have allocated nearly 75 percent of funds.
And the pandemic and its economic fallout have not gone away. Every state has faced a budget gap. They took actions to close those gaps, like passing temporary budgets or making rosy assumptions about future revenues and federal aid. If they’re wrong about these sources of relief, states will have to reopen their budgets to look for more spending cuts or additional revenue increases.
Like here in my home state of Michigan. Lawmakers and the governor were able to reach an agreement to fill a COVID-induced fiscal year 2020 budget deficit of $2.2 billion, thanks in large part to CARES Act money. But for fiscal year 2021, which for Michigan starts in October, the state faces a $3.1 billion projected deficit.
Blaring sirens: States remain in a fiscal free fall
In May, Richard warned that all 50 states face “an economic and fiscal crisis of a size and speed not seen since the Great Depression.” Sadly, his prediction is coming true. Just last week, we learned that the economy shrank by 9.5 percent during the second quarter of the year.
Indeed, 27 states expect to see tax revenues fall $34 billion short of pre-pandemic forecasts for fiscal 2020 and $80 billion short for fiscal year 2021. My TPC colleague Lucy Dadayan explains that extrapolating to all 50 states, total tax revenue shortfalls will be roughly $200 billion for fiscal years 2020 and 2021.
People have begun to experience the consequences of states’ fiscal distress. State and local governments have cut 1.5 million jobs since March, most of which were in education. And these job cuts will reverberate throughout the economy.
It’s time for Congress to stop playing games with state and local aid
Federal aid to states and local governments remains a political football. Back in April, Senate Majority Leader Mitch McConnell said he favored allowing states to declare bankruptcy rather than giving them a federal “bailout” for mismanaged employee pensions, ignoring the huge fiscal costs of the pandemic to states. Richard exposed the flaws in McConnell’s argument.
Last month, Treasury Secretary Steven Mnuchin told CNBC that “It’s unfair for states like Florida to be bailing out states like New York.” Aside from the fact that this is not how federal aid to states works, Florida faces a budget shortfall, too.
This game is exhausting, and it’s getting old.
Congress needs to continue to directly support states and localities' fiscal health during the economic fallout from the COVID-19 pandemic, as Tracy and Richard have argued. Congress did it during the depths of the Great Recession, and they can and should do it again.
Maryland’s Republican Governor Larry Hogan and New York’s Democratic Governor Andrew Cuomo issued a joint statement last week arguing for $500 billion in federal aid. My colleague Howard Gleckman suggested last week that Congress may end up somewhere around that number, splitting the difference between the House and Senate positions. The House wants $1 trillion of aid for state and local governments, while the Senate has thus far has proposed $105 billion for schools that open for in-person instruction.
I hope Howard’s prediction is right.
But when will Congress get there? States have been mired in fiscal uncertainty since April. There are millions of people out there thinking about school, their jobs, their health, … and the November election.
The Tax Hound, publishing once a month, helps make sense of tax policy for those outside the tax world by connecting tax issues to everyday concerns. Have a question or an idea? Send Renu an email.
