Experts Call for More Federal Aid for State and Local Governments

February 11, 2021 by Victoria Turner

State and local government revenues were not hit as hard as expected by the pandemic, but the looming uncertainty of its long-term impact points to the need for more federal aid, leading economists say.. 

At the start of the pandemic, state and local governments anticipated sharp declines in revenues due to the ensuing economic contraction. 

However, the total revenue for 2020 was only 0.5% below that of 2019, not at all the loss that many estimated, according to Byron Lutz, assistant director and chief of the fiscal analysis section of the Federal Reserve Board.

Presenting his co-authored analysis on the novel coronavirus’s impact on these fiscal budgets during the Brookings Institution’s annual winter Municipal Finance Conference webinar, Lutz said the year-to-date findings are “starkly different” from any other recession the country has faced – even the Great Recession of 2008. Revenue gains and losses have not decreased as severely as previously estimated, he said.

State and local government tax revenues have positively “held up” more than anyone expected, Lutz said. Personal income taxes, which were experiencing strong pre-pandemic growth and a severe decline at the start of last year, “bounced back” up to a 2% growth by the end of 2020. Sales and state tax collections remained much the same as the prior year. 

With the “unprecedented” financial aid from the federal government, a concentration of unemployment at the lower-income level leading to less of a revenue hit, an unprecedented level of taxable unemployment benefits, the sales taxes holding up due to an increase of durables consumption per household, and a continuous rise in the stock market, Lutz said the “story up until this point has been pretty rosy.” 

However, the “key part of the story” is in fact the financial aid that state and local governments received, said Rachael Eubanks, treasurer of the state of Michigan, which ended up receiving about $44 billion in federal aid through the Paycheck Protection Program, enhanced unemployment benefits and the stimulus checks. 

Echoing Lutz, Eubanks said Michigan had rapidly adjusted their budget at the onset of the pandemic but came to realize by the summer that “this recession was just not like previous recessions” and they could not use the typical economic indicators, like the unemployment rate, because the “recessionary trends” are so dissimilar.

 In one month, she noted, 25% of the workforce was unemployed – even when doing a comparison to Michigan’s worst year during the Great Depression, the current unemployment “eclipses” 2009. Spending had dropped across the board, but then spiked above pre-pandemic levels once unemployed individuals received their benefits, she said, seeing a switch to buying durable goods in light of the drop in service spending. 

Another uptick in Michigan sales tax came from the switch to online shopping over brick-and-mortar stores, which normally would be in the $10 to $30 million range but increased to about $300 million.

“Revenues are where they are today because of federal aid,” Eubanks said, pointing out the difficulty of budgeting for the long-term when this aid keeps coming in “in pieces” instead of knowing what you have to work with. 

“We all want to make the best decisions we can with those taxpayer dollars,” she said.

A rough estimate of revenue loss from 2020 to 2022 puts it at $200 – $300 billion for the states and local government, said Lutz. Including the last round of financial relief in December, they have received around $400 billion in federal financial aid, which more than covers the expected loss. This does not mean, however, that there is no more need for more financial aid as the uncertainties surrounding the ongoing path of the pandemic and the “rosy” picture could turn dim.

Any additional federal aid would “boost spending” and provide a “buffer” for any new and unexpected expenses created by the pandemic — such as the likelihood of funding remedial education in the future, any restrictions the stimulus has on how it can be used in each state, and the “extreme uncertainty over future budget conditions” with the varying levels of strain per state. 

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