The COVID-19 Pandemic Is Crushing State Budgets. A Federal Bailout Is Still a Bad Idea.

There is no state that will weather the COVID-19 pandemic without making difficult decisions. But the revenue hit will be less severe in places that were being thrifty and vigilant.

When it became clear that the COVID-19 pandemic was going to wreck the state's tax revenue, lawmakers in Utah got out their scissors.

In June, the state legislature made more than $1 billion in emergency budget cuts, slashing spending across more than 100 line items in the state's education and general funds. State Senate President Stuart Adams (R–Layton) told The Salt Lake Tribune that the cuts were necessary as part of "short- and long-term decisions that will sustain the state today while we deal with the uncertainties of tomorrow." A month later, it appears that quick action and a willingness to make tough decisions may have spared Utah from the kind of severe budget shortfall other states are now facing. The Tribune reported last week that Utah's tax revenue doesn't seem to be declining as sharply as was initially feared.

It probably helped that Utah had been preparing for a situation like this.

Once every three years, Utah is required by state law to conduct a budgetary stress test. While other states have similar requirements, Utah's is one of the most thorough in the country, according to Jeff Chapman, the director of the state fiscal health project for the Pew Charitable Trusts, a nonprofit that encourages states to adopt more sound budgetary practices.

"The exercise helped state leaders prepare for the expected budgetary distress in two ways: First, it gave policymakers a head start in considering which tools they could use to close the gaps," Chapman writes. "Second, Utah had a model in place for analyzing the quickly changing fiscal outlook."

COVID-19 was an unexpected and unprecedented challenge for state and federal policymakers. But even an economic downturn as severe as the one caused by this pandemic fell within the parameters of Utah's most recent economic stress test. When it hit, the state's Legislative Fiscal Analyst projected a drop in tax revenue of between $1.7 billion and $4.6 billion over five years and quickly provided lawmakers with a menu of options for keeping the budget on track.

Other states are faring far worse. "Responding to this crisis has created a multiyear budget crisis unlike anything the state has ever faced before, more than three times worse than the Great Recession," Maryland Gov. Larry Hogan, a Republican, told NPR this week. Ron DeSantis, the Republican governor of Flordia, has compared the state's budget situation to the bloody "Red Wedding" from Game of Thrones

Expected budget shortfalls will equal 20 percent of all state spending by June 2021, when the current fiscal year ends for most states, according to a separate analysis by the Center for Budget and Policy Priorities, a liberal think tank.

The pandemic has hammered every source of revenue that states rely on. Income and sales taxes have fallen everywhere. Western states that rely heavily on taxes based on the extraction of oil have been whacked by a huge slow down in travel and the collapse of oil markets. And the dropoff in tourism has caused taxes on hotels, rental cars, and other services to crater as well.

The federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provided $150 billion to states, but that money was earmarked for coronavirus response efforts—like disease testing and unemployment programs—and can't be used to plug budgetary holes created by falling tax revenue.

Now, Congress is debating plans for another coronavirus stimulus bill. A bill that has already cleared the House would bail out states to the tune of $1 trillion, but Senate Republicans have so far opposed that effort.

While some state officials are understandably keen on the idea of a federal bailout, many others say it would be a mistake to pile more debt on the national credit card in order to get states off the hook.

In a letter to Congress last week, more than 200 state lawmakers said "bailing out the states would be harmful to taxpayers, federalism, and ultimately the states themselves." The letter, sent by the American Legislative Exchange Council, a nonpartisan group of free market-friendly state lawmakers, says that a federal bailout would amount to "rewarding states that have made poor financial decisions at the expense of those that have been fiscally responsible."

Indeed, if Utah can figure out how to effectively cut and manage its budget during a pandemic, why should residents have to pay for another state's mistakes?

If the federal government is going to provide emergency funds to states, taxpayers must get to see where the money goes, says Marc Joffe, a senior policy analyst with the Reason Foundation, the libertarian think tank that publishes Reason. "Did the money go to respond directly to the harms caused by the pandemic, or was it instead used to plug preexisting holes in pension systems?"

Since states don't have the unlimited borrowing authority that the federal government enjoys and must nominally balance their books every year, they should take precautions to prepare for lean times. Pew suggests more stress testing, like what helped Utah prepare for the pandemic, but also the building of budgetary reserves and avoiding unsustainable future budgetary plans.

There is no state that will weather the COVID-19 pandemic without making difficult decisions. But the revenue hit will be less severe—and the recovery probably quicker—in places that were being thrifty and vigilant. When the pandemic is over, policymakers should remember that.