States have been so overwhelmed economically by the COVID-19 pandemic that they urgently need more federal assistance, warn the National Governors Association (NGA) and the National Conference of State Legislators (NCSL).

Gov. Larry Hogan (R) of Maryland and Gov. Andrew Cuomo (D) of New York, the chair and vice chair of NGA, said in a joint statement that the pandemic had caused “catastrophic damage to state economies.”

“In the absence of unrestricted fiscal support of at least $500 billion from the federal government, states will have to confront the prospect of significant reductions to critically important services all across this country, hampering public health, the economic recovery, and...our collective effort to get people back to work,” the statement said.

Without naming a dollar figure, The Hill reported April 14 that Treasury Secretary Steven Mnuchin and Senate Democratic leader Charles Schumer (D-New York) are close to a deal on an interim coronavirus relief bill that would provide money to businesses, hospitals and state governments.

Unlike the federal government, states are legally required to balance their budgets. Many states have beefed up rainy day funds in recent years, but no state has enough in its reserves to offset the free fall of revenues caused by pandemic-induced shutdowns.

“You can’t turn off state spending as fast as you can turn off state revenue,” said Arturo Perez, director of state services for NCSL.

Forty-five states, the District of Columbia and New York City impose sales taxes, which have plunged during the pandemic, especially on big-ticket items. Spending on groceries has held fairly steady, but only 13 states have a sales tax on food.

Six states - Florida, Nevada, Tennessee, Texas, South Dakota, and Washington - derive half to two-thirds of their tax revenue from sales and excise taxes, compared to the national average of 35 percent. Of these states, only Tennessee has a state income tax.

Revenue declines will be particularly heavy in the 43 states that levy income taxes, said Mandy Rafool, director of fiscal programs for NCSL.

Most of these states have copied the federal action of allowing taxpayers an extra 90 days to file their 2019 tax returns, pushing income tax collections into the 2020-2021 fiscal year.

Rafool said states are estimating reduced revenues from all sources of 15 to 20 percent in the coming fiscal year. “The big question is how long the shutdown lasts,” she said.

The duration of the shutdown is indeed the $64 question, to borrow a phrase from a 1940s radio show that means a particularly difficult question or problem. For the states, it’s now a multi-trillion dollar question.

The recently passed $2.2 trillion stimulus bill (the CARES Act) provided $150 million to state and local governments but limited use of the money to costs relating to the pandemic, such as providing emergency treatment facilities.

With a majority of Americans sheltering at home and all but essential businesses shuttered, the pandemic has struck more abruptly and with greater force than the Great Recession of 2007-2009, the last time states received federal emergency assistance.

In the forefront of the fight against COVID-19, state governments have increased public health efforts, closed schools and mobilized the National Guard.

Governors of both parties anticipated the reach of the virus before the federal government did and called for social distancing and shuttering to halt its spread.

The pandemic came at a time when states had finally emerged from the shadow of the Great Recession, which began in December 2007 and lasted until June 2009.

State revenue growth lagged behind the overall recovery in the wake of the Great Recession. As late as fiscal 2017 revenue growth remained sluggish in some states.

But revenue growth has soared in the last two years. Last December the National Association of State Budget Officials (NASBO) found that state revenues had for the first time exceeded the revenue levels that existed when the Great Recession began.

Forty-six states reported revenues that exceeded targets, allowing many states to put extra money into rainy day funds. This gave them a useful but insufficient cushion when the pandemic struck.

California, with an economy larger than all but five nations in the world, has the biggest cushion with a surplus of nearly $21 billion. All this and more will be needed during the current pandemic.

Before the pandemic, California’s department of finance modeled the impact of a mid-range recession in 2020. Revenue losses in this model would amount to $50 billion over two years with additional declines after the recession ended.

“Clearly, the revenue losses in this actual [pandemic-induced] recession will be much worse,” said H.D. Palmer, a spokesman for the department of finance.

All states have been damaged economically by the pandemic but not equally.

Oxford Economics recently ranked states according to their economic vulnerability to pandemic shutdowns. It found that an elderly population and reliance on retail and small business made a state more vulnerable and prospectively could dampen economic recovery.

The most vulnerable states, according to the Oxford analysis, are Maine, Nevada, Vermont, Florida and Oregon. The least are Nebraska, Maryland, Virginia, North Dakota and Alaska.

Hawaii, with a heavy reliance on tourism, is also considered vulnerable by many economists. It ranked as tenth most vulnerable on the Oxford list.

States were enjoying the good times when NASBO issued its rosy assessment of revenues last December. But a recent compendium of state actions by NASBO’s director of state fiscal studies Brian Sigritz paints a grimmer picture.

Governors and legislators are now assessing ways to compensate for lost revenues and, when possible, postpone fiscal decisions.

For instance, Kentucky’s General Assembly passed a $11.4 billion one-year budget for fiscal year 2021 instead of the traditional two-year budget because of uncertainty about future revenues.

Similarly, Arizona Gov. Doug Ducey (R) signed a $11.8 “skinny budget,” passed by the legislature before temporarily adjourning, to ensure the state government can operate into fiscal 2021. The budget includes no new spending.

Missouri’s legislature approved a $6.2 billion coronavirus response plan that gives Gov. Mike Parson (R) executive discretion in spending the funds.

In New York, the state hardest hit by COVID-19, Gov. Cuomo announced the highlights of an enacted $177 billion budget that will allow him to cut spending unilaterally in the middle of the fiscal year without consulting the Legislature.

In California the Legislature approved up to $1 billion in additional spending to respond to the pandemic before suspending its session for a month. Gov. Gavin Newsom (D) will draw up the customary May budget revision without benefit of knowing the state’s income tax receipts. His budget director has already advised state agencies not to expect full funding for new or existing programs.

A complete list of state actions listed in the NASBO report is available here.

State legislatures can’t hide from the coronavirus, but they can, like the rest of us, practice physical distancing and delay spending decisions. As of April 13, 25 states had postponed legislative sessions, according to the NCSL.

Most of the other states have adjourned their sessions or — in the case of Arkansas and North Carolina — not yet convened them.

Shutdowns of the present magnitude are unprecedented. Beyond any recession, they have left states and local governments in a condition of economic paralysis.

When the shutdowns are lifted, whenever that may be, and legislators return to action, they’ll face an array of difficult spending decisions.

-- Lou Cannon

Ten States Most, Least Economically Vulnerable to COVID-19

Maine is the U.S. state that is most economically vulnerable to the coronavirus pandemic, while Alaska is the least vulnerable, according to a study by Oxford Economics. The study ranks the 50 states according to 10 variables, including the share of their populations over the age of 65 and how dependent their economies are on heavily impacted industries like retail and tourism.

 


To our readers,

Given our historic national crisis, most of this edition of the State Net Capitol Journal is focused on the wide array of efforts being undertaken by state and local officials to deal with the fallout from the COVID-19 pandemic. That said, we will also do our best to keep you informed of other important actions from our statehouses while we faithfully stick to shelter-in-place requirements and other best practices aimed at flattening the curve of the spread of this deadly virus. So please be safe, be smart and let’s all work together to get through this with as little harm as possible.

 -- State Net Capitol Journal Managing Editor Rich Ehisen

For a complete rundown of all the legislative and regulatory actions being taken by federal, state and local governments, visit our new COVID-19 Update page.