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States Must Improve Finances in Antiracist Response to COVID-19

To achieve an antiracist and inclusive economic recovery from COVID-19’s ravaging of jobs and state budgets, states must fill their revenue shortfalls in equitable ways while building a foundation to grow thriving, inclusive communities.

COVID-19 and the recession it spurred upended state finances by forcing states to spend much more to contain the virus and address the economic harm as people lost jobs and income, and also by creating huge revenue shortfalls that states must now close.

More federal aid would be a huge help to states, localities, territories, and tribal governments as they try to balance their budgets, fill revenue gaps, and avoid painful budget cuts that harm families and exacerbate the crisis’ inequities, including higher job loss and death rates among people of color. But regardless of what federal policymakers do, state lawmakers should:

  • Tap rainy day funds. State rainy day funds were at record highs of about $75 billion as of 2019. Using these funds to address budget shortfalls can help states buy time to avoid damaging cuts that can deepen and prolong the downturn and further entrench racial economic inequities. And it can fuel state economies by keeping essential, frontline workers like teachers and health care workers on the job and able to maintain their basic spending. Tapping rainy day funds can also help states provide economic security assistance, like food assistance, to families losing jobs and income. And using rainy day funds won’t likely harm a state’s credit rating.
  • Raise new revenue from wealthy families and profitable corporations. Outside of using reserves to close their shortfalls, states can either cut services, which often harms families most in need, or raise new tax revenue. Tax increases are typically a better option, especially in bad times and when they target the wealthy. Families’ access to wealth has largely determined how they’ve fared during the pandemic, with wealthier families — who are disproportionately white — better positioned to avoid the worst health and economic harms. This divergence reflects both racial and class inequities. Better taxing wealth and high incomes can also reverse the central injustice built into nearly all state and local tax codes — that they ask the least as a share of income from those with the most. Revenue from wealth taxes can help pay for both crucial ongoing priorities such as education and for new pandemic-driven needs, such as higher health spending and more assistance to help families make ends meet. States’ options include increasing taxes on the highest earners’ income, on capital gains, and on owning, buying, and selling expensive homes, as well as expanding estate and inheritance taxes.
  • Roll back economic development incentives and other tax breaks for profitable corporations. Economic development incentives cost states a total of about $45 billion per year, despite evidence that they don’t contribute meaningfully to state economic growth and often reward companies for business activity in which they would have engaged anyway. The incentives’ benefits tend to flow to shareholders (who are mainly wealthy and white), further entrenching racial inequities. When so many families are struggling to make ends meet, this strategy is especially poorly targeted. States should roll back these incentives and put the savings toward responding to the pandemic and helping families meet basic needs. Investments that raise the incomes of people in poverty, lower barriers raised by discrimination and bias, and increase opportunities for a high-quality, affordable education are all proven ways to improve a state’s quality of life and build a healthy, sustainable economy.
  • Reduce barriers for local governments to raise revenue. Addressing local governments’ shortfalls is also important for a stronger economic recovery. Localities provide many crucial community services and functions, such as running schools, maintaining parks, and providing clean water to communities. But many localities face unnecessarily strict barriers to raising revenue such as property tax limitations. These limits provide disproportionate savings to owners of more expensive homes, who are likelier to be white than Black or Latinx — in part due to past government policies that segregated people of color in lower-value areas. Relaxing property tax limits could take some pressure off state governments and bolster states’ COVID-19 responses.

After the Great Recession of a decade ago, states responded in ways that worsened racial and class inequities and hardship for many struggling families, especially in communities of color. When facing budget shortfalls they relied heavily on laying off workers, which unnecessarily prolonged the recession, and cut funding for schools, colleges, and other services. Some states also slashed income taxes and shifted to rely more heavily on regressive sales taxes, and most increased fees and fines associated with the justice system. States must make better choices this time.