Why States Didn’t Go Broke from the Pandemic

iStock.com/udmurd_PL

 

Connecting state and local government leaders

COMMENTARY | The predictions were for a massive downturn in state finances because of COVID-19 but the predictions were wrong.

During the summer of 2020, there were many news reports about the impending state fiscal crisis due to the pandemic. A July 7 article on CNBC with the headline “Cuts to basic services loom as coronavirus ravages local economies and sends states into fiscal crisis” reflected the concern.

State officials were very worried that the pandemic would bring huge reductions in tax revenues and huge hikes in Medicaid spending, and I was in agreement with these concerns.

There was reason for this worry: In the past, state fiscal crises since 1980 generally happened during broad economic downturns, because of both the fall in state tax revenues and an explosion in spending as individuals who lost their jobs came on the Medicaid rolls.

Because Medicaid is a federal entitlement, states have little control over spending, but are required, on average, to cover 45% of the total spending on the program in the state. The number of people covered by Medicaid had already been expanded when the Affordable Care Act in 2010 provided incentives to states to expand health care to millions more low-income Americans.

So states were anticipating a big problem as COVID-19 wrought havoc with employment. Before the pandemic hit, some were already spending more than 30% of total state expenditures on Medicaid, and the looming drop in sales and income taxes had state and local officials even more on edge.

But the disaster didn’t come.

All Downturns Are Different

As a former executive director of the National Governors Association, I know that state leaders still have a vivid memory of the Great Recession of 2009-2010, when revenues were down dramatically by about 10% in 2009 and an additional 1.7% in 2010.

Not only was that decline deep, but because it was caused by a financial meltdown, the recovery was very long. It essentially took eight to 10 years for most state revenues and spending to return to pre-recession levels.

The other complicating factor in state finances is that, unlike the federal government, 49 of the 50 states have some form of balanced budget requirement. So in a downturn, this requirement forces states to cut other spending, often education, which is the other major spending category, or raise taxes.

Unfortunately, both of these actions further weaken the economy during a recession. This is why most federal stimulus bills provide funds directly to state and local government to offset this negative impact on the overall economy.

But every economic downturn is different – including this one related to COVID-19.

Muted Economic Impact

For this most recent COVID-19 downturn, there are several reasons the impact has not been as severe on states as expected.

First, tax revenues have held up surprisingly well. For example, sales tax revenues declined by only 0.5%, largely because consumers continued to shop but did so online as opposed to at brick-and-mortar stores. Since states now tax most online sales, this meant sales tax revenues were maintained.

States like Texas, Alaska and Louisiana and a few others where the private sector has significant oil and gas revenues often pay taxes to the states based on the energy sales or production. These are known as severance tax revenues, and they held up because energy prices recovered much faster than expected and production was maintained.

Most important, income tax revenues were down only 4.7%, because many middle- and higher-income individuals shifted from the office to working from home with little employment interruption.

Federal Government Provides Buffer

Early action by the federal government largely cushioned the downturn’s expected explosion of Medicaid spending.

Specifically, on March 18, 2020, the Families First Coronavirus Response Act was signed into law. It included an increase of 6.2 percentage points in the federal share of Medicaid for each state.

For example, in Connecticut, the federal government traditionally pays 50% of Medicaid costs, and the state pays 50%. Under this provision the federal government would pay 56.2% and the state would pay only 43.8% – and it was retroactive until back to Jan. 1, 2020.

This allowed states to reprogram funds they had originally budgeted for Medicaid to other needs, like education. Even in a small state like Connecticut this could be close to US$500 million a year.

A program that provided health insurance for poor children, which operated under a Medicaid-like sharing of costs between the federal government and the state, also got a bigger federal match.

Economic Growth Surging

Finally, unlike the Great Recession, this downturn has not been as deep, and the recovery will be quicker and much more robust.

Essentially there is a lot of pent-up demand for travel, entertainment and eating out in restaurants. Consumers have money to spend, as the savings rate is up substantially. The savings rate in the United States has been between 7% and 8%, but during the period between February 2020 and December 2020, it fluctuated between 13.6% and 33.7%.

This is why many economists believe that the economy in the first quarter of 2021 is growing at an annual rate of 10%, and why the Federal Reserve on March 17 projected the economy will grow 6.5% for 2021. That’s a major revision upward from the 4.2% projection in December.

Because this will be a rapid recovery, it will quickly translate into similar growth in state sales tax and income tax receipts, which are the two largest sources of state revenues. Further, the Medicaid rolls will shrink as individuals find jobs and receive employer-paid health care once again.

[Over 100,000 readers rely on The Conversation’s newsletter to understand the world. Sign up today.]

This is not the end of the story. State and local governments will be receiving an additional $350 billion from President Joe Biden’s recently signed $1.9 billion Covid relief bill.

While there are some overall restrictions on how the money can be used – it can’t be used to cut taxes or fix underfunded state pension obligations – most of the money is relatively flexible in terms of use.

The challenge for states now is whether they are capable of efficiently spending these surplus funds on long-term critical needs.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Raymond Scheppach is a professor of public policy at the University of Virginia.  

NEXT STORY: 2020 Census Data: Which States Gain, Lose Seats in the U.S. House?

X
This website uses cookies to enhance user experience and to analyze performance and traffic on our website. We also share information about your use of our site with our social media, advertising and analytics partners. Learn More / Do Not Sell My Personal Information
Accept Cookies
X
Cookie Preferences Cookie List

Do Not Sell My Personal Information

When you visit our website, we store cookies on your browser to collect information. The information collected might relate to you, your preferences or your device, and is mostly used to make the site work as you expect it to and to provide a more personalized web experience. However, you can choose not to allow certain types of cookies, which may impact your experience of the site and the services we are able to offer. Click on the different category headings to find out more and change our default settings according to your preference. You cannot opt-out of our First Party Strictly Necessary Cookies as they are deployed in order to ensure the proper functioning of our website (such as prompting the cookie banner and remembering your settings, to log into your account, to redirect you when you log out, etc.). For more information about the First and Third Party Cookies used please follow this link.

Allow All Cookies

Manage Consent Preferences

Strictly Necessary Cookies - Always Active

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data, Targeting & Social Media Cookies

Under the California Consumer Privacy Act, you have the right to opt-out of the sale of your personal information to third parties. These cookies collect information for analytics and to personalize your experience with targeted ads. You may exercise your right to opt out of the sale of personal information by using this toggle switch. If you opt out we will not be able to offer you personalised ads and will not hand over your personal information to any third parties. Additionally, you may contact our legal department for further clarification about your rights as a California consumer by using this Exercise My Rights link

If you have enabled privacy controls on your browser (such as a plugin), we have to take that as a valid request to opt-out. Therefore we would not be able to track your activity through the web. This may affect our ability to personalize ads according to your preferences.

Targeting cookies may be set through our site by our advertising partners. They may be used by those companies to build a profile of your interests and show you relevant adverts on other sites. They do not store directly personal information, but are based on uniquely identifying your browser and internet device. If you do not allow these cookies, you will experience less targeted advertising.

Social media cookies are set by a range of social media services that we have added to the site to enable you to share our content with your friends and networks. They are capable of tracking your browser across other sites and building up a profile of your interests. This may impact the content and messages you see on other websites you visit. If you do not allow these cookies you may not be able to use or see these sharing tools.

If you want to opt out of all of our lead reports and lists, please submit a privacy request at our Do Not Sell page.

Save Settings
Cookie Preferences Cookie List

Cookie List

A cookie is a small piece of data (text file) that a website – when visited by a user – asks your browser to store on your device in order to remember information about you, such as your language preference or login information. Those cookies are set by us and called first-party cookies. We also use third-party cookies – which are cookies from a domain different than the domain of the website you are visiting – for our advertising and marketing efforts. More specifically, we use cookies and other tracking technologies for the following purposes:

Strictly Necessary Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Functional Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Performance Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Social Media Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Targeting Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.