Red, Blue States Alike Need More Federal Support

President Trump and Senate Majority Leader Mitch McConnell argue that doing more to help states cope with COVID-19’s severe economic fallout would just “bail out” Democratic-led states, which they portray as fiscally wasteful. But, in reality, unemployment is rising sharply in all states, devastating their income and sales tax revenue. Both “red” and “blue” states will need more fiscal relief to avoid having to make deep budget cuts to meet their balanced-budget requirements, which would hurt families and communities while worsening the recession.

Since the pandemic and economic fallout began, officials in 16 states (including the District of Columbia) have re-estimated revenues for this fiscal year (which ends on June 30 in most states) and officials in 22 states and D.C. have done so for next year — and, in every case, revenues are falling, often by huge amounts. (See table.)

Republican-controlled Arizona and West Virginia project declines for the current fiscal year of 12 and 11 percent, respectively, while Maryland and Illinois — whose legislatures are controlled by Democrats — project declines of 15 and 7 percent. These are all large shortfalls and will require large spending cuts or tax increases, given that the declines have occurred almost entirely within the year’s last quarter, so those states and every other one will have little time to offset them.

Shortfalls in the upcoming fiscal year are also large across states controlled by Republicans and Democrats. On Friday, Georgia’s Republican governor and legislative leaders requested that schools and other agencies prepare for 14 percent cuts next year, which starts on July 1. Meanwhile, Democratic-controlled Illinois projects shortfalls of 19 percent next year.

Similarly, initial unemployment claims have exploded in every state as businesses have closed or scaled back, laying off workers. Claims in Georgia, Kentucky, Louisiana, Michigan, and Pennsylvania — all states with Republican-controlled legislatures — have surged particularly quickly, as have claims in Democratic-controlled Hawaii and Nevada.

State budget shortfalls could total $650 billion over three years, we estimate based on new economic projections from the nonpartisan Congressional Budget Office and updated projections from Goldman Sachs. After accounting for federal aid that policymakers have already enacted and state “rainy day” reserve funds, states still face about $510 billion in projected shortfalls. What’s more, this estimate doesn’t reflect the additional shortfalls that local governments, territories, and tribes face.

The wide range of state projections shown in the table reflects both the uncertainty states face and their varying methods of projecting shortfalls as they begin assessing the damage. (Some states are still using only pre-crisis data, for example.) As more states report projections, and as states that already have reported learn more about the damage done, the size and bipartisan nature of this budget crisis will become even clearer.

Given that state fiscal needs transcend party labels, it’s no surprise that the National Governors Association, co-chaired by Maryland’s Republican governor, Larry Hogan, and New York’s Democratic governor, Andrew Cuomo, is pushing strongly for adequate state fiscal relief. The two governors recently called for $500 billion in direct federal aid for states to replace lost revenue, as well as an increase in the federal matching rate for covering state Medicaid costs.