State policymakers will soon begin addressing shortfalls that have already arisen in their current budgets even as they prepare next year’s budgets, and many states are bracing to make deeper, more damaging cuts than they’ve already imposed if they don’t receive additional federal fiscal aid.
State and local tax revenues have plummeted as people have less income, shop less, and reduce their economic activity in other ways due to the coronavirus and the worst economic downturn since the Great Depression. For example, state sales tax collections in the second quarter of 2020 (April through June) dropped over 14 percent compared to the same quarter a year ago; in a typical year, they’d grow 3 to 5 percent.
Six states (Massachusetts, New Jersey, Pennsylvania, Rhode Island, South Carolina, and Vermont) have delayed adopting a full budget for fiscal year 2021 (which started on July 1 in most states), and the fiscal year hasn’t started in Alabama, Michigan, and the District of Columbia. But many states that have adopted their budgets assumed much higher revenues than they now expect and didn’t fully account for recent cost increases due to the pandemic. These and other states will undoubtedly revisit their budgets as COVID-19’s budgetary toll and the likelihood of more federal aid become clearer. For example:
Some states have already made deep cuts to offset huge revenue shortfalls triggered by COVID-19 and the recession. The initial cuts of spring and early summer caused sizable harm through layoffs, furloughs, and cuts to vital public services. States and localities already have laid off or furloughed over a million workers, far more than in the Great Recession of a decade ago and its aftermath. Without a new round of flexible federal aid, the cuts will only grow, harming families, communities, and businesses and delaying the economic recovery.
States will try to shield K-12 public schools and health services, but it’s nearly impossible to protect them entirely over time, since education and health make up more than half of state spending nationwide. Indeed, several states have already slashed crucial health programs, such as substance use treatment and prevention.
As the President and Congress negotiate a new relief package, the House-approved Heroes Act offers a sound starting point. It includes close to $900 billon in grants to states, localities, territories, and tribal governments and would boost the share of Medicaid costs that the federal government pays. More fiscal aid is essential for communities nationwide, especially those hit hardest by the unprecedented events of recent months.