Senior Vice President for State Fiscal Policy
The emerging bipartisan agreement on the Senate’s economic emergency legislation contains very significant new resources to help states address their massive, immediate budget problems due to COVID-19, though it almost certainly doesn’t go far enough. Congress will need to come back and provide more help to states and families affected by the crisis, as some policymakers have already called for.
States are incurring huge new costs as they seek to contain and treat the coronavirus and respond to the spike in joblessness and related human needs. At the same time, they’re projecting sharply lower tax revenues — beginning right now — than they had expected, because economic activity has plummeted. And their reserve funds are nowhere near enough for a crisis of this magnitude. Without considerable federal aid, states will have to cut very deeply, and very quickly, into basic core services — or raise taxes massively — just to keep functioning. That would worsen the recession and delay the eventual recovery.
The agreement includes $150 billion in a new fund that states and local governments can draw down right away to meet virus-related costs they may incur in calendar year 2020. It also contains:
By way of comparison, the federal government spent $207 billion last year on discretionary federal grants to state and local governments — that is, grants outside of Medicaid and other mandatory programs. So the new resources in this agreement are substantial.
However, annual state budget shortfalls totaled about $227 billion in the worst year of the last recession (adjusted only for inflation, and not including city and county shortfalls), and will likely be even larger in this recession. That’s both because unemployment is rising much more rapidly, causing steeper drops in income and sales tax revenues, and because the direct costs to state and local governments related to the virus are entirely unprecedented.
The federal government will have opportunities in coming weeks and months to give states additional aid as the exact scale of the crisis becomes clearer; at this point, delays in reaching agreement will bring some states closer to real financial distress. This Senate bipartisan agreement is a crucial first step.