The COVID-19 Budget Crisis Makes Federal Aid to States Critical

THE COVID-19 BUDGET CRISIS MAKES FEDERAL AID TO STATES CRITICAL

With states’ revenue streams drying up, state employees have been laid off and core services cut. This has increased the number of residents needing aid while reducing state aid available to vulnerable people when they need it most.

This research and analysis is part of our Discourse series. Discourse is a collaboration between The Appeal, The Justice Collaborative Institute, and Data For Progress. Its mission is to provide expert commentary and rigorous, pragmatic research especially for public officials, reporters, advocates, and scholars. The Appeal and The Justice Collaborative Institute are editorially independent projects of The Justice Collaborative.

The economic freefall caused by COVID-19 has decimated state budgets and created an unprecedented crisis. States depend primarily on income and sales tax revenue to fund services, including education and health care. But as unemployment rose at an unprecedented rate (and remains at an alarmingly high level), income tax revenue plunged. And as retail sales racked up the largest two-month decline on record, sales tax revenue has plummeted (May state sales tax revenue dropped by close to $6 billion, or 21%, compared to May 2019). 

Although it is impossible to predict the full effect of COVID-19 on state budgets, the steep drop in the national GDP is more than twice as large as the economic collapse during the Great Recession. Early estimates indicate that states will face a collective budget shortfall of approximately $555 billion from 2020 through 2022, even before accounting for pandemic-related expenditures such as increased costs for public hospitals, unemployment, and public safety. 

Because states generally operate under balanced budget requirements and do not have sufficient reserves for severe economic downturns, states either need to bring in more money or cut costs during a recession. By contrast, the federal government can engage in deficit spending, giving it the flexibility to smooth out spending when revenues decrease in a recession. The federal government can use this spending to help fill state budget gaps through aid packages, such as the $150 billion already available to states through the CARES Act for some pandemic-related expenditures. But because the CARES Act primarily targeted states’ extra expenses due to COVID-19, it did not help states make up for falling income and sales tax revenue.