Coronavirus

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.

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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.

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  1. “The COVID-19 Pandemic Is Crushing State Budgets.”

    Nope.
    The inept response of the state governments is crushing state budgets.
    Deal with it. VOTE!

    1. They shut things down here and then cried about lack of tax revenue. They proposed increasing property taxes and there was such an uproar they just shut up and sat back down.

      1. Raising taxes on the unemployed? Ok.

        1. Well with all that new found leisure time from having been unemployed, they should have plenty of time to earn a little bit extra for the state. Lazy, ungrateful peasants.

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    2. the COVID-19 pandemic was going to wreck
      the one caused by this pandemic
      The pandemic has hammered
      weather the COVID-19 pandemic without making difficult decisions.

      Supposedly Libertarian magazine can’t correctly identify government as cause of problems. Film at 11.

    3. This.

      Surely the pandemic would have adjusted the economy generally downwards, and perhaps by a not insignificant amount. But the economy would not have cratered to worse than depression levels.

      That was government’s doing.

      Unfortunately, it appears that any hope ay of us might have had to move towards smaller government is dead. We are now in an age of nothing but big government, and they’re goanna bleed us dry for the privilege of being under their decree.

      1. The virus primarily seriously affects the old and infirm, who are mostly not participating in the economy anyway. Without the absurd government overreactions, the effect of the virus on the economy and tax collections would have been negligible.

  2. At this point, it looks like Western Democracy will be forever changed due to a slightly-more-dangerous-than-regular-flu-flu.

    1. Yep.

      Any hope that any of us might have had to moving towards smaller government is dead.

    2. Not a flu.

      1. right, it’s a much-more-dangerous-than-regular-cold-cold

  3. very easy decisions could be made.

    1. There are no easy decisions when the government is doing the deciding.

  4. Well who in government gives a shit? Nobody and they never have.

    Let it crash. It’s the only way to get rid of the oligarchs.

    1. They don’t care because not a single one of those fuckers will feel the repercussions of their actions. They all deserve to be publicly hanged, but what they’ll get is a bigger budget.

  5. Cut! Cut! Cut! I don’t care what they cut. I don’t have much use for the governments of any level beyond the real basic stuff (police, courts, road maintenance, etc.) So get your scissors out and knock yourselves out.

    1. An obvious starting place is stop paying teachers who will not teach.
      The NEA spends a gazillion dollars a year telling us how important and essential the propagandists are, then whine like a socialist when actually asked to do their damn job.

      1. ^This.

  6. This is the horseshit I’ve come to expect from Reason. Yes, we can clearly afford 2 trillion in debt to cut taxes so the wealthy can benefit but nooooooo, we cannot expect to get OUR cut of OUR taxes to bail out OUR states from a 100 year pandemic.

    What a bunch of crap.

    1. If you think tax cuts should count as a budget line item that belongs to the govt that needs to be “afforded” or paid for, you are in the wrong place, maybe you are looking for a left leaning place to rant?

      Everyone got something in the tax cut. Avg family got a couple thousand a year, that isnt nothing. More wealthy families got more, but they also are getting leached for a yearly amount that would make you shit a brick if you saw that tax bill. You dont give any credit when a 1%er pays 200k+ in taxes to further the goals of society while a middle class person maybe pays 10-20k, but god forbid that person gets to keep more of their money.

      “we cannot expect to get OUR cut of OUR taxes to bail out OUR states ”

      Funny how everyone who tends to use this rhetoric about taxes always really means “when can we get YOUR cut or YOUR taxes that YOU pay, for the stuff that WE want to be paid for”.

      1. Actually, right on.

    2. wearingit
      August.4.2020 at 6:32 pm
      “This is the horseshit I’ve come to expect from Reason…”

      This is the horseshit we’ve come to expect from fucking lefty ignoramuses, and we’re rarely disappointed.
      Fuck off, slaver.

    3. l see no horse manure in the article, and it’s quite in line with the libertarian idea individuals should be responsible for themselves, and that states should also be responsible for themselves, and not look to government force to get others to pay their bills.

      If anything, IMHO, the article doesn’t clearly put the onus on the Democrats to explain why they should hold the US hostage demanding that the feds bail out their failing state and local governments and that federal taxes will be raised (one way or another) to do it. Personally, I hope no further spending bill is approved. I can’t see spending beyond facilitating testing and vaccines. Contact tracing should be handled locally.

      The best way for the government to handle the virus, is to get out of the way, and allow business owners to make, and enforce with government help, their rules (at least allow them to ban non-mask wearing customers) to keep their employees and customers safe. Taxing us to pay us extra unemployment or provide loans to businesses to keep employees on the payroll when they don’t work is clearly socialist.

  7. I believe California decided on borrowing from future budgets and the federal government to make their budget. Gavin Newsom is so savvy!

  8. For the umupteenth time: Covid did jack shit. It’s the response that did this.

  9. ‘The first thing we do, let’s kill all the lawyers,’ — Dick the Butcher

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  11. “When it became clear that the COVID-19 pandemic was going to wreck the state’s tax revenue…”?
    Nope. Not clear at all. Killing off 85 year olds will have a neglible affect on State budgets. It is the government response that is harming the budgets…and all Americans

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    1. English classes must cost too much.

  13. If your Governor and legislative branches suck vote them out. Or move. It’s not your job is secure in a crappy state.

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