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With business closures and layoffs sharply reducing state income and sales taxes, we estimate that state shortfalls will total about $555 billion through 2022. (Photo: Beata Zawrzel/NurPhoto via Getty Images)

With business closures and layoffs sharply reducing state income and sales taxes, we estimate that state shortfalls will total about $555 billion through 2022.  (Photo: Beata Zawrzel/NurPhoto via Getty Images)

States, Localities Need More Federal Aid to Avert Deepening Budget Crisis

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.

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 ColoradoMissouriOhio, 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:

  • In California, lawmakers trimmed business tax breaks and used nearly half of the state’s reserve fund to limit proposed cuts to education and health care, but the final 2021 budget still has $11 billion in cuts, including $1.7 billion to colleges and universities and $248 million to housing programs. Budget writers have said they’ll restore most of these cuts if more federal funds arrive.
  • In Florida, Governor Ron DeSantis vetoed $1 billion in spending that lawmakers approved before the crisis and ordered agencies to look for up to 6 percent more in cuts. The vetoes affected (among other things) money for community colleges and services related to behavioral health, including opioid and other substance use treatment services, crisis intervention services, and services for people experiencing homelessness.
  • In Georgia, policymakers approved a 10 percent cut for 2021, including a nearly $1 billion cut for K-12 public schools and cuts to programs for children and adults with developmental disabilities, among others.
  • In Maryland, Governor Larry Hogan has proposed nearly $1.5 billion in cuts. Some $413 million of those cuts are already taking effect, nearly half of which will fall on colleges and universities, likely driving faculty furloughs, pay reductions, and cuts to financial aid.
  • In Nevada, policymakers responded to a projected $1.2 billion shortfall by tapping one-time funds and approving more than $500 million in cuts. The cuts will fall most heavily on K-12 and health programs, for example through lower Medicaid reimbursements for doctors and less money for literacy programs.
  • In Tennessee, lawmakers cut $1 billion from Governor Bill Lee’s spending plan, including sizable cuts in services for people with disabilities and aid to local services such as public transportation.
  • In Texas, Governor Greg Abbott called on agencies to propose cuts of 5 percent from their current two-year budgets, which produced harmful proposals such as a $133 million cut in health services related to women’s health, family violence prevention, and services for individuals with traumatic brain injuries.
  • In Wyoming, Governor Mark Gordon called on agencies to propose cuts of up to 30 percent to offset crashing revenues due to the recession and falling revenue from natural resource extraction.

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.

© 2020 Center on Budget and Policy Priorities

Wesley Tharpe

Wesley Tharpe is Deputy Director of State Policy Research at the Center on Budget and Policy Priorities. In this role, he helps lead a team of analysts in the Center’s State Fiscal Project and conducts research on a range of state tax, budget, and economic policies.

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