Funding state and local governments whose revenues have been decimated by the pandemic remains a sticking point in Congress as lawmakers continue negotiating another coronavirus relief bill.
Many Republican senators oppose further aid beyond the $ 150 billion provided by the Coronavirus Aid, Aid, and Economic Security Act in March, despite economists warning that austerity measures by state and local governments could fuel economic recovery of the country will hinder.
In contrast to the federal government, most state and local administrations are bound by balanced budget requirements. When income falls, they either need to cut spending or raise taxes.
"And states face this one-two victory in recessions: just as their revenues fall, demand for the programs they offer rises," said Tracy Gordon, such as subsidized health care and monetary aid for people on low incomes. Senior Fellow at the Urban-Brookings Tax Policy Center.
It's a story similar to the financial crisis the state and local governments experienced during the Great Recession, but on a larger scale. This spring, state income tax fell about 40% and sales tax fell about 15%, Gordon said.
Without federal support, Gordon said the drop in sales would likely lead to more job losses.
"State and local governments employ more workers than any other sector – more than retail, more than manufacturing, more than healthcare. So when they cut jobs, it affects the larger economy."
Marketplace's Kai Ryssdal spoke to Gordon about what is at stake for state and local governments as the recession unfolds – and how their spending cuts could affect the economy as a whole. The following is an edited transcript of their conversation.
Kai Ryssdal: Give me the thinness of how states and cities did, say January, February, before it all went south?
Tracy Gordon: States went into this year with the highest savings on record, expecting pretty good sales growth – around 2.5% to 4% – due to federal events, the 2017 Tax Act, and a Supreme Court ruling made it clear they had authority were to tax online sales.
Ryssdal: So here we are now, nine months later; The world has obviously changed. What do cities and states see on their way into the holidays and the new year?
Gordon: The initial shocks in state income and sales taxes were worse than in the Great Recession. Income taxes fell by around 40% in March and April and sales taxes by around 15%. They have returned from that cliff, but there is a concern that the resurgence we are seeing in the receipts is only temporary.
And states are confronted with this double victory in recessions: just as their revenues are falling, the demand for the programs they offer increases – subsidized health insurance, cash support.
Ryssdal: Determine the medium term future. What will it look like next July when cities and states are confronted with these problems?
Gordon: I think one thing that is also getting lost in the discussion is that public finances tend to lag behind what is happening in the economy. If you expect states to impose income taxes on income earned in the 2020 calendar year, it will have an impact on their finances in 2021. To the extent that unemployment remains high, the states themselves predict loss of income by 2024.
Ryssdal: 2024 – three more years?
Gordon: At the beginning; I think sales estimators are paid to be conservative. And it all depends on how we contain this virus. There is ample evidence that staying home is not necessarily mandate, but rather people's fear that prevented them from doing business in the market. So I think when people feel safe again, income will start to pick up again.
Ryssdal: When the Biden government calls you on the afternoon of January 20th after your inauguration and says, "What do you think we should do to structure an aid package for cities and states?" What will you tell them
Gordon: I wrote a blog about it saying it should be quick, flexible, and formula driven, and I still think it is. So I would advocate tying it to economic conditions like unemployment.
In the Great Recession, we saw aid shut down in the summer of 2011, but states faced bad fiscal years for about two years. State and local governments employ more workers than any other sector – more than retail, more than manufacturing, more than healthcare – and when they cut jobs, it affects the larger economy. And what we saw in the Great Recession was that almost every quarter between 2009 and 2014 [state and local budgets] weighed on the overall economy. So we don't want that to happen again.
Ryssdal: A word here about how this will manifest itself for people just trying to get through out there. I mean, if they don't have the money, states and cities don't have the federal government's luxury of running deficit spending or putting more money on the books, so they have to cut somewhere.
Gordon: Precisely. And most of what state and local governments do is labor intensive. They provide services that people and businesses depend on. I think what we saw in the first few months was that they cut a lot of jobs. 1.3 million jobs have been cut since March, mainly in education. That affects things like the quality of education; To the extent that they constrain capital projects, it affects infrastructure – things that will contribute to future economic growth.
Are States Ready to Introduce COVID-19 Vaccines?
Claire Hannan, executive director of the nonprofit association of immunization managers, which represents state health officials, said states had made good progress in their preparations. And we could have multiple vaccines pretty soon. But states still need more funding, she said. Hannan doesn't think a lack of additional funding would hold up the distribution at first, but that could cause problems later. "It's really worrying that Congress may not pass funding or that there is information floating around that states states don't need additional funding," she said.
How is the service industry dealing with coronavirus restrictions returning?
Without another round of the paycheck protection program that kept many companies afloat in the early stages of the pandemic, the outlook for places like restaurants is bleak. Some in the San Francisco Bay Area, for example, got only a week of indoor dining back before cases picked up and restrictions came back in place. Restaurant owners are revamping their business models to survive, waiting to see more help.
How are hospitals dealing with the nationwide surge in COVID-19 cases?
According to the Ministry of Health and Human Services, almost one in five hospitals in the country has a critical shortage of staff as the pandemic and more and more medical professionals suffer from COVID themselves. One of the consequences of staff shortages is that people with other medical needs are being asked to wait.
As a nonprofit news organization, our future depends on listeners like you who believe in the power of public service journalism.
Your investment in Marketplace helps us stay paywall free and ensures that everyone regardless of their ability to pay has access to trustworthy, unbiased news and information.
Donate today – any amount – to become a Marketplace investor. Your commitment makes a difference more than ever.