Deputy Director, State Policy Research
As states revisit their spending plans for the 2021 budget year, which began July 1 in most states, they are making deep budget cuts to offset huge revenue shortfalls triggered by COVID-19 and the worst economic downturn since the Great Depression. The initial state and local cuts enacted in spring and early summer caused sizable harm through layoffs, furloughs, and cuts to vital public services. Unless federal policymakers provide a new round of flexible fiscal aid, the harm will only worsen.
With business closures and layoffs sharply reducing state income and sales taxes, we estimate that state shortfalls will total about $555 billion through 2022. That’s a sharper drop than even in the worst three years of the Great Recession and its aftermath of a decade ago, and it doesn’t include the added state and local costs to confront the virus, such as more testing centers and hospital capacity. States must balance their budgets even in recessions, so state policymakers face enormous pressure to fill these shortfalls however they can, including with damaging cuts.
Some states and localities started slashing spending almost immediately once the severity of the crisis became clear. Governors in Colorado, Missouri, Ohio, and other states used their executive authority to enact emergency cuts for the final months of fiscal 2020, and local governments in particular quickly began to cut their workforces. In April and May alone, states and localities furloughed or laid off 1.5 million workers, about twice as many as in the entire aftermath of the Great Recession. Nearly half of the April layoffs were school employees.
Many states waited to impose lasting, larger-scale cuts, hoping for additional federal aid and seeking a better sense of where the economy was headed. Yet with most states starting a new fiscal year this month, budget writers could only wait so long. In the past few weeks, several states have dramatically cut their 2021 spending plans. Significant recent actions include:
Some states have found ways to shield K-12 public schools or health services from their initial cuts, but that’s likely unsustainable. Policymakers will find it nearly impossible to protect these programs 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.
More federal aid would enable states to reverse many of these cuts and minimize further cuts next year, when revenues likely will still be significantly depressed. That would limit further damage from the crisis, which has especially hurt people of color and economically struggling communities. It also would help lay the groundwork for state and local economies to recover more strongly.
The current crisis is simply too large for states to handle on their own. Federal aid in the Families First Act and CARES Act, both enacted in March, helped, but only about $100 billion of it is flexible enough for states to use to offset revenue shortfalls and limit cuts in services. Even after accounting for states’ “rainy day” reserves, which were a historically high $75 billion when the crisis started, about $380 billion in potential shortfalls remains through 2022.
As the President and Congress hammer out details of another relief package in the coming weeks, the House-approved Heroes Act — with about $540 billion for states, localities, territories, and tribal governments — offers a sound starting point. More fiscal aid is essential for communities nationwide, especially those hit hardest by the unprecedented events of recent months.